Fresenius Medical Care AG (FMS) 2002 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by welcome to the Renal Care Group second quarter earnings conference call. During the presentation all participants will be in a listen only mode. Afterwards you will be invited to participate in the question and answer session - at that time if you have a question please press the one followed by the four on your telephone.

As a reminder this conference is being recorded Wednesday July 31st 2002.

I would now like to turn the conference over to Mr. Dirk Allison - Chief Financial Officer for Renal Care group - please go ahead Sir.

Thank you mam. Good morning ladies and gentlemen and welcome to the Renal Care Group conference call I'm Dirk Allison Chief Financial Officer of the company.

As you can tell Sam Brooks our CEO is not with us today. Sam is feeling a little bit under the weather and apologizes for missing this call he should be back at work shortly.

By the way our company has recently moved into our new corporate offices in Nashville - so if we have any phone problems, please be patient and we will clear them up.

Renal Care is proud to announce another strong quarter - however before we continue with this call, our general council had asked me to read this statement.

Some of the information we provide and discuss in this call is forward looking information and is given in reliance on the Safe Harbor provided by the Private Securities Litigationary Format. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from these forward-looking statements due to certain factors due to certain factors including business and economic conditions and the availability of financing.

These and other risks and uncertainties are discussed in reports filled with the SEC.

Now let me introduce others here today - our Chief Operating Officer - Gary Brukardt is with us today and will discuss certain aspects of our operation. Our Chief Medical Officer - Doctor will review our medical outcomes for the quarter and bring you up to date on legislative events in Washington D.C. and as always I will have a more detailed financial presentation following .

Let me now give a brief over view of our financial highlights that you will find in more detail in our press release.

For the quarter ended June 30, 2002, compared to the second quarter of 2001, revenues increased 21 percent to $222 million. EBITDA exceeded $51 million. Net income increased 23 percent to approximately $23 million. And earnings per share increased 18.9 percent to 44 cents per share.

We're very pleased to have the privilege to report these fine results that you're management has delivered to Renal Care Group.

Now let me turn the call over to Gary Brukardt, for his presentation. Following Gary, Ray will make his presentation, and then I will give a more detailed financial report on the company, after which we will take you're questions. Gary.

Yeah, thanks sir, and good morning everyone. I'd just like to make a few comments regarding our operations for the company in this quarter.

The first thing I'd like to do is complement our operational management team on their solid performance in the second quarter. Total clinical labor hours per treatment decreased sequentially in the second quarter, over the first quarter. The total clinical labor costs per treatment, decreased slightly despite higher health benefit costs.

These productivity improvements were accomplished while maintaining a high level of patient satisfaction, and continuing to produce solid clinical outcomes in the outcomes that has set for us. So, I've been very proud of this group, and what they've accomplished in this particularly quarter.

Also, if you recall some time back, I've shared with you in the past, our company initiatives and programs that have been designed to help develop our frontline supervisor's management skills. We've conducted multiple management development programs for our key 350 managers in the company, and emphasis has been placed on our facility managers because each and every day they do the job of taking care of our patients.

It's our belief that these programs have contributed to the excellent results mentioned, but most significantly however, and what I'm very proud of, is that we have reduced our frontline manager turnover from a high of 26 percent to 12.6 percent year to date. I'm also pleased to report a reduction in our annualized turnover rate, which had a high a couple of years ago, of 36 percent, but we're now down to 27.2 percent.

Now, I'm not pleased with that, none of our management team is, but we are moving towards our target of 20 percent or less, which is kind of where health care, is, in general. But we'd like to be below that number, if we could be, and our efforts are continuing to work in that direction.

It's our firm belief that a stable and well-trained group of manager's leads to reduced turnover amongst all of our associates. And we want to create an environment and culture where people simply want to work and be successful.

Along with the management development programs, we are continuing our efforts to become a learning organization at each and every level. And going to talk about our recent medical meeting.

We must continue to have competitive wages in our company, good long and short-term benefits, as a company. In 2002, for example, we actually increased our matching program and increased our tuition reimbursement program, so that more employees can take advantage of that, and increase our skill levels within the company.

In Healthcare, it's absolutely paramount to retain staff, as well as to recruit staff. A stable work force, an experienced work force, is critical, particularly in dialysis treatment, where people depend on us three times a week. We're going to be continue to be confronted with shortages of licensed staff in certain markets. And it's incumbent on us, as a management team to address these issues in an effective and responsible manner in order to protect the interest of patient staff positions and our shareholders. Now we're going to continue to do that so we think all these programs, environmental factors et cetera impact this but managers, we have a responsibility to address it.

In order to continue to create the right culture and to attract and retain staff, we got to continue to challenge and question ourselves as an organization. Thus right now, we have launched a company wide survey in corporation with the gallop organization of all 6,000 associates and this survey is intended to determine what we're currently doing right and to serve as a guide to determine how we can improve ourselves to continue to be not just the best company in our sector of health care, but to be the best company in all of health care.

We simply want to create a culture in environment where people can be successful in a place where they want to work. Right now our management team is engaged at all levels of the organization in the process of developing the 2003 business and profit plan. This is a very critical process for us as an organization and it focuses on every aspect of the companies activities and it's a very process at all levels of the organization and we've historically done that.

As we go into this process, I view that as our responsibility as managers to manage effectively those components of the plan the business that we can directly impact and then to develop strategies designed to confront and litigate those environmental factors over which you may have less of an influence. This management has set goals for itself, they have those goals and they've done that historically for a long period of time and I'm very proud of what they've done.

I thank them for that. October we should have a pretty good sense of where we expect to be in all phases of our business in 2003 so I just want to share a little bit of what's happened in the second quarter from an operating point of view. Some of the continuing efforts that we have going on, we just simply want to be a learning company. We want people to be proud to work for our organization and take good care of our patients and achieve the results both clinically and financially that we've set for ourselves.

I'd like to turn the program over to our Chief Medical Officer, . Go ahead.

Thank you Gary. Good morning ladies and gentlemen. I'm pleased to comment on a number of areas that compliment our reports of the financial and operations performance that had been discussed and which Dirk will comment on more extensively later on.

But firstly I'd like to discuss with you the medical outcome of patients served by our associates and . I'd also like to comment on the regulatory and legislative effort that I'm involved in. As far as the medical outcomes, I'm pleased to report that this quarter we had continued to improve on the percentage of patients who received optimal dose of dialysis. This is expressed as URR or reduction rate and the minimum dose recommended by various agencies is 65 percent.

But our medical advisory report has targeted a URR of 70 percent as optimal. Based on this higher target, I'm pleased to tell you that more than 75 percent of patients received this dose of dialysis and because of our continued effort in this area, this is more than four- percent improvement over last year. Using the targets, URR of 65 percent which is what the regulatory agencies use, more than 90 percent of our patients had achieved this does do dialysis.

In terms of management, we have maintained a percentage of patients with of 33 percent at slightly greater than 75 percent which exceeds the medical advisory board targets of 75 percent of patients. This is a difficult to achieve target and it will be very hard for us to exceed it without running into regulatory issues by the fiscal intermediaries. So we'll probably not see much of a change in this number unless CMS acts on accumulating data that they between 36 and 39 percent do result in better patient outcomes. Specifically reduce hospitalization and mortality.

During this quarter working together with our associates and physicians we were able to reduce hospitalization rates to 11.9 days per patient per year, which is more than two days below the national average of 14.4 days. This 11.9 days per patient per year is also one hospital day less than the first quarter of this year.

As we discussed from the last call oxygen includes data on full patients from the time they join oxygen facilities, and because in the first quarter we included about 900 new patients in our database we saw an increase in overall hospital days and mortality.

However as these new affiliates adopt our best demonstrative practices their hospitalization and other patient outcomes generally improves, and I believe we're seeing this already.

Finally during this quarter the most out has declined to 20.3 percent which is 17 percent lower than the last quarter, and I again I suspect it was because of the adoption by our newer affiliates of these best demonstrative practices. Our one-year rolling average mortality is down to 21.7 percent again compared to the national average of about 24 percent or so.

One of the great ways by which we disseminate best practices and learn from each other is the annual oxygen medical meeting. This year it was held in May and we had more than 725 associates and physicians.

Incidentally, physicians pay their own way to come to this meeting. By most accounts it was a wonderful learning experience that energize our associates to live what we believe is oxygen messaging which is doing well by doing good.

We also finished our annual patient satisfaction survey, although not all the results are in, the early indications are, that in response to a question related to overall satisfaction, with the level of care and facilities, more than 90 percent of the patients said they were satisfied or very satisfied with the level of care.

I will be able to give you more details on this at the next call. But we're very pleased with these preliminary results, which also had a very high participation rate by the patients.

Next I'd like to comment on the regulatory and legislative areas. On the regulatory side I'm very pleased to tell you we've had a series of meetings with CMS, Metbag and the GEO office to discuss with them a series of issues that impact oxygies and as well as the industries ability deliver optimal care to our patients.

I must give credit to Tom Scully and his associates at CMS for a series of open door meetings that allowed all providers to bring specific issues to the attention of CMS and I believe these have resulted in a number of positive developments.

The most recent one is the re-issuance of the program memorandum on eprogen and the three-month rolling average inadequate. This stopped or avoided each fiscal intermediary coming up with their own set of eprogen reimbursement guidelines and really confusing a lot of our ability to deliver the best care we can to the patients.

The other CMS decision that I believe came from this open dialogue is the staying of the rules by some intermediaries to impose the trial of oral vitamin for young patients before they become eligible for intravenous forms of vitamin D.

So I believe these were two positive developments from the series of exchanges ideas that we've had, we and the other providers in the industry with CMS and affiliated regulatory agencies.

We also presented to CMS an industry wide market basket formulated that we hope will help them to calculate an annual update to the dialysis composite range.

On the legislative side as you may know the house passed the Medicare bill that included no increase in the composite rate in 2003 and 1.2 percent in 2004.

These are less than the recommendations and we are now working very diligently in the senate and particularly with members of the finance committee members to bring this issue to their attention.

All of the ones we have been able to talk to have been very sympathetic to the issues we've raised and I remain optimistic that the senate version will include a reasonable updates and then we'll see what happens at the house senate conference.

But basically none of us are giving up on this issue until the President signs the bill.

This concludes my presentation and I'd be happy to answer any questions now. Dirk.

We are happy to report that our earnings per share for the second quarter 2002 was 44 cents compared with 37 cents for the second quarter of 2001.

This 18.9 percent increase in our EPS was driven by continuing increase in our revenues, offset by an increase in our patient care costs largely caused by the January 1st 2002 increase in and a few select items I will discuss in a minute.

In addition our stock buy back program had a positive effect this quarter allowing us to beat consensus estimates by 1 cent per share.

Our second quarter revenues increased 21.1 percent to $222.2 million, as compared to $183.5 million for the second quarter of 2001.

Our same store treatments grew 5.9 percent year over year, which is within the range of the 5 to 7 percent, which we had as our 2002 annual goal.

Our revenue per treatment increased 7.6 percent to $296 per treatment as compared to $275 per treatment for the second quarter of 2001 and $290 per treatment for the first quarter of 2002.

This year over year increase was due in part to the private pay increase we implemented beginning in late fourth quarter of 2001 as well as ancillary changes made during 2001.

Our patient care cost increased to 65.6 percent of revenues in the second quarter of 2002 as compared to 64.8 percent in the same quarter in 2001.

Our per treatment basis patient care costs increased 7.7 percent to $195 per treatment as compared to $181 per treatment for the second quarter of 2001.

This increase is caused mainly by the higher cost of we're are experiencing due to the January 1st 2002 price increase we received from as well as the ancillary changes made in 2001.

AS you should be aware by now Renal Care Group has been able to mitigate approximately 20 to 25 percent of the 33.9 percent increase in which was effective for our company on January 1st 2002.

In addition in the early second quarter of this year announced another price increase in of 3.9 percent.

This price increase will not affect Renal Care Group in 2002 due to our current contract and we believe that we have been able to mitigate approximately 80 percent of this increase for 2003.

As we previously discussed our labor costs have been increasing in the past few quarters at approximately five to six percent. The effective quarter of 2002, our annualized labor increase was six percent. We continue to work hard in this area of cost control as Gary's report demonstrates. We are still experiencing a nursing shortage in our market.

In addition to the labor pressures we had two additional issues impacting our margins for the second quarter. First, nationwide recall of , our supply cost for the drug increased by approximately 50 cents per treatment for the quarter. This increase should continue until the end of the year when we believe that the manufacturer will have corrected their problem and be back to full manufacturing capacity.

The second issue affecting our margins is our insurance program. As your all-aware, insurance premiums have been increasing at a rate that is significantly higher than was expected when we prepared our 2002 budget. Our insurance program renewal was at the beginning of the second quarter. These high premiums that we experience that negatively affected our EBITDA margins and will continue to do so into the foreseeable future.

Our general administrative expenses were 8.5 percent of revenues in the second quarter of 2002, that's compared to 8.6 percent in the same quarter of 2001 while our provisions for bad debts declined to 2.6 percent of revenues as compared to 2.7 percent of revenues in the same quarter of 2001. This reduction in bad debt expense is due to the excellent cash collections experienced by Rental Care Group over the past few quarters.

Our EBITDA for the second quarter was $51.9 million or 23.4 percent of revenues as compared to $44 million or 24 percent of revenues during the second quarter of 2001. As previously discussed, the people who affect our EBITDA margin was approximately 20 to 30 basis points. The other items mentioned affected our EBITDA margins approximately 30 basis points of which 20 basis points of this reduction should continue at least through the end of the year.

During the second quarter of 2002 we continue to experience strong cash collections. Our operating cash flow for the quarter was approximately $31.5 million. During the second quarter, our day sales outstanding grew to 60 days. This two day increase was entirely due to the delay in a painting our provider number for Mississippi and Denver Colorado acquisitions. We received both of these numbers in mid July and have now been able to build the approximately $10 million in accounts receivable due to our company.

Of this amount, we have now collected over $7 million and expect to collect the remainder of these receivables during the next couple of months. We believe that we should see day sales outstanding go back down to the 58 day level or below during the third quarter of 2002. Our balance sheet continues to be strong as of June 30th 2002 we had 40.2 million in cash on hand.

We had no bank debt as of the end of the second quarter. Our total long-term debt of $2.8 million consists entirely of capital leases. As June 30th 2002 our shareholders equity was $543.2 million. Our annualized return on equity continues to be strong at 16.9 percent. Concerning our activities this quarter we've acquired 345 patients.

This included the purchase of the dialysis program in Philadelphia having 275 patients. We own 100 percent of this program. This acquisition continues to build on our strength in the Philadelphia and the Southern New Jersey markets. We also acquired 70 patients in Memphis from Southern medical . This program is a joint venture with Renal Care Group owning 90 percent or 63 patients.

These acquisitions along with the North Mississippi Medical program we acquired at the end of 2001 gives us a net acquisition total for 2002 of 1040 patients. We continue to be ahead of pace for 2002 - our 2002 goal of acquiring at least one thousand patients.

Since our pipeline of potential deals remains strong we continue to believe we should be able to succeed our 2002 acquisition goal by approximately 300 to 500 patients. During the second quarter of 2002 our company opened seven facilities.

Year to date we have opened 11 facilities which puts us on target to open the 18 units that we have budgeted. share with you an up date with you on our stock repurchase plan.

During the second quarter of 2002 the company repurchased 419 thousand seven hundred shares of our stock for a total purchase price of 13.9 million dollars so far in the third quarter of this year we have purchased an additional 542 thousand seven hundred shares - spending 15.8 million dollars.

Program to date we have required a total of one million 342 thousand four hundred shares spending approximately 41 million dollars. It is managements plan to continue to purchase our stock during the coming year.

Operator with that let's now open up the call to questions.

Thank you, ladies and gentlemen if you wish to register a question for today's question and answer session - you will need to press the one followed by the four on your telephone, you will hear a three tone prompt to acknowledge your request.

If your question has been answered and you wish to withdraw your polling request you may do so by pressing the one followed by the three. If you are on a speakerphone please pick up your handset before entering your request.

One moment please for your first question.

Our first question comes from from - please go ahead sir.

Good morning this is actually calling in for Darren - I was wondering if you could give me a little more color on the - give us an update on the malpractice environment and have you seen your claims deteriorate and what level are you at right now?

I mean we have not seen our particular claims in medical malpractice change year over year they remain very consistent and the one thing we did do is the way of what we're accruing, as we renewed our program for insurance we did up our deductibles and we have put reserves on the book to accrue up to our maximum level of exposure.

Yeah, Neil you may wanna know that we don't insure positions for their practice but we do insure them for as Medical Directors and so that may mean why we are not seeing that increase that everybody else is talking about - I mean positions are indeed experiencing an increase in their malpractice but that's an issue that we don't deal with.

OK thanks and just a quick data point can you give us the capex in the quarter?

Ah, yeah capex for the quarter was approximately - just give me second - hold on - should' a had that number right here. Capex was 17 million dollars for the quarter bringing year to date to 30 million dollars.

Ok, thank you very much.

Our next question comes from from - please go ahead sir.

Hi you guys - great job. Two questions - one on the repurchase just you still have cash and no debt, your closet competitor - you know has a lot of debt although their not that what's, do you guys have a target, I mean seems like you could really be more effective with a higher you know debt to EBITDA ratio, I just wondered if you've got an ultimate target you'd like to achieve and secondly just talk about at the state level what your seeing on reimbursements for drugs or on the composite rate.

OK, I'll handle the first part of that Rick, talking about our re-purchase and debt and then Ray will handle the state level of reimbursements.

We do know that our balance sheet is un-levered, no question about that especially if you look at the other major competitors in this industry, we are significantly under levered as compared to them.

We do believe that we have the ability to leverage our balance sheet appropriately for the good of our shareholders and we're looking at ways to do that, one of the ways we're looking to do that as we've mentioned to you relates to our stock buy back, to date mentioned we bought about 1.3 million shares, it would be managements goal that over the next five months we buy another million shares, on open market purchases, but let me again emphasize, we keep, we keep trying to keep a clean balance sheet to be able to take advantage of opportunities that arise should they arise, so again to summarize how we use our cash, and our debt capacity, acquisitions stay foremost in our mind and if we can get them at the right price and if they're the right acquisitions we'll do as much as we can.

Second would be our program that this year we plan on having 18 up from 14 last year and we remain committed to that and again will increase that as there's availability of physicians and then finally is our buy back program which this year, you know we've already spent 41 million and if we spend another, buy another million shares, it'll be another 30 plus million dollars.

You just keep generating the cash as fast as your spending it.

Yes to date we've been able to do that, that's correct and we are looking for opportunities strategically that would allow us to appropriately use debt but to date, one of the things this management team has been committed to and remains committed to is the appropriate use of debt.

I just, I guess my question was do you have a debt to EBITDA type ratio that you think is the best suited for your company?

Well we would be comfortable all the way up to about two and a half times EBITDA and feel very good with that, if again, the stipulation to get there though is not just to use debt, its to use debt appropriately.

I understand, and so far you're doing a good job. I guess the other question was just about the reimbursement level of the states.

Yeah, as you know there is no reimbursement there by the state but by the fiscal intermediaries and we as an organization perhaps different than many others we have been dealing with different fiscal intermediaries.

I believe we deal with about 12 of them across the United States.

That's' correct.

And one of the things that has been happening that I eluded to is, there was a program memorandum on how intermediaries should evaluate the payments for in relationship to the level of that was achieved and that a uniform way for us to be able to meet those guidelines by CMS at that time and we did not have any problem with making the appropriate justification for the payment of and other ancillaries.

For the program memorandum lapsed, it had a lifetime of five years and it lapsed I believe somewhere late last year, and since that time we have experienced a number of fiscal intermediaries making decisions on the level of that should be allowed and appropriate dose of and it was so different between different immediacies that we raised the issue up to CMS at a number of meetings with them both open door and closed door meetings, and to their credit they responded with reissuing a uniform set, basically the same program memorandum again that will make our lives and everybody else's life a little bit easier.

Specifically in terms of what is being held by fiscal intermediaries is we don't we're not aware of anything that's pending any you know any large amounts of money I think they have been responsive to our documentation and they have paid as reasonably on time as we would expect them to so I don't see a big issue but I'm not sure that I've answered your question yet.

I just was so sure some of the medications and so forth that they were trying to reduce reimbursement on some areas.

Yeah, it's not that they if you're looking at AWP differences that has happened yet because there was no consensus in Congress and as you may know and we made our case with the GEO about AWP margins four years and they basically said its not an issue so they did not recommend any change that we're aware of to congress.

Last question as long as I've got you and are congress still looking to pass the law for re-importation of drugs from Canada or elsewhere would that, could you buy cheaper in another country would that help you potentially.

Well I suspect it may but until the law is passed its probably speculating on our part whether it would or not, as you know there is a strong sentiment from against us so whereas the Senate feels in favor of it so I'm not sure where that issue will rise but you know whenever you have any competition or different sources for the product that you use its always sets up an advantage for the buyer so.

All right great, well thank you very much I appreciate that.

Our next question comes from from . Please go ahead sir.

Great, Thank you, I've a question for Gary, Gary I believe you said in your comments that you actually experienced a reduction in your average labor costs for treatment. Can you just clarify that a bit and if that's true exactly how you were able to achieve that with the increase in labor costs.

Well what we've done as I said it was a slight decrease for the quarter and what we've been doing is a very intensive productivity focused program on a unit by unit basis. We set targets within the company and then tried to work towards those targets and we don't use ratios as set in our organization but rather we try to look at productive hours and so we have an initiative with both our local managers and our corporate staff and if you recall I think on a call sometime back I talked about the implementation of our people soft programs, general leisure system and our management of our payroll and hours per treatment. So now we've got a much better handle on a more real time basis in terms of where we are with our labor costs. I'm not saying that we can continue that we focused on it its a constant thing that we work on as operators but we had a pretty good result in the second quarter now the challenge is to sustain that now I'll add to that though in certain markets we're going to continue to feel wage pressure, as you know there is shortage of licensed personnel is different then its ever been in this industry and we'll have challenges in particular markets so I think they did a good job on focusing on it and getting some pretty good results.

Then if I could add one of the ways in which we improve productivity is not by reducing personnel, but making the ability to do patient care more effective. For example: All of our new facilities have central delivery of dollar faith, so that the nurses, instead of carry germs back and forth and fill it up and measure different stuff in it, it's all provided to them at the bedside.

Also, they are beginning to accept, physicians are beginning to accept protocols and best-demonstrated practices better. So that with delays in terms of getting a specific organ on, a specific patient is becoming much less, cause it's all standardize protocol. So it's all working together in the operations side, medical side, nurse's side, to get the efficiencies that we hope to affect.

Frankly, what we find is that in a local unit level, we try to sit down with the local staff and just do what Ray outlined. We try to look at work redesign process fees. Can we do something better? Can we do it more efficiently? And of course the people that know that, dancer to people doing the job.

So, we have taken a couple of target markets and really focused on, how can we do work redesign, working with the medical department and working with the physicians to do a better job? So, I couldn't tell you one particular thing that contributes to that and sustaining it, is always a challenge of management and so I think Ray did a good job at explaining how we get there.

Great, thanks, one separate question for Ray. I believe seeing us were suppose to deliver a report to congress in June or July on the whole issue of an inflation and adjustment factor for dialysis. Can you give us a sense about where that is and what they are thinking on the topic as of this point?

Yeah, we have been told that the last open door meeting which was in mid July, that their CMS has come up with a de-polled and recommendation. But it's being previewed by older people that need to preview things that CMS report before it gets published.

So our expectations is, that before the end of the year, it should be available at a public level, but that's our, at least from the people who are supposed to be counting the numbers, have done so, is what we are told.

And have they indicated to you in these meetings, what their, what their attitude is, about moving towards that type of a program?

No they have not, but frankly in our meetings with them, they began to understand better, some of the forces that impact on the ability to deliver services under the compost rate from labor, to benefits, to supplies, to all of these things.

Plus, we have also tried to work with them and show them issues that may have been missed in the past, like the consideration of bad debt for equal , bad debts for the facilities, so all of these things, I can tell you, we have talked to them about and they seem to understand the issue. What they do with it, unfortunately so far is not known to me.

But they were receptive to the issues that you're going with, that we are presented with them.

Great, thank you very much.

Our next question comes from from Morgan Stanley, please go ahead.

Thank you. You mentioned on your ability to elevate some of the increases in EPO, that in this year, you would be able to elevate about 20 percent, but for 2003, that you guys would elevate or mitigate about 80 percent of it? Could you talk about that a little bit?

Well Gary, we have tried to work with the on a longer-term contract, so had the moment we are discussing at almost finally agreed on a two year contract that will have an ability, provided we continue our focus on patient outcomes, so review that increase based on achieving a level of and achieving a level of you know, across the system, so I think it included the ability to include the growth of in the new affiliates that we have, and that we think will help us meet those goals also, so it's been a long difficult negotiations but I think we have, and they have been very good partners with us, and I think we have achieved what we believe is good for both of our organizations, but mostly good for our patients.

So if I just follow up, is the difference that '02 contract was a one-year contract, and that the '03 contract is a two-year contract?

Well the '02 contract has been changed into a three year contract, so we've modified it now so that it includes '02 and '03.

OK thank you.

Our next question comes from Arthur Henderson from . Please go ahead.

Hi. Dirk, I was wondering if you could tell me what the acquisition Dollars spent were in the quarter?

Yes. For the quarter, cash paid for acquisitions 16.2 million.

And what does the environment, in terms of acquisition, look like, are you finding it more difficult to find acquisition candidates now than you were previously, and your focus is now more on the 'No' vote, can you just give us a picture on that?

Yeah, you know that environment is an every-changing environment. We have a good pipeline as we mentioned in our presentation today. The thing we find is that occasionally a private group will come up and have some money that is put in and will offer more than we're willing to buy. We recently lost an acquisition that we thought we were close to announcing due to the fact that the private group offered what we considered more than we could generate , so in that case, it gets a little frustrating that people are out there paying more because apparently for them, it means more than for us as far as what they can pay.

However, if you look at it on the overall environment, if you look at the major companies, we don't see a lot of the other major companies looking at deals. We see them occasionally, but I would Renal Care is probably the most active out there, so from that standpoint, we are able to see a number of deals. The problem with deals today, are they tend to be smaller, maybe 100 to 200 patients on average, and there's is not quite frankly as many. You have to do more to hit your 1,000 patient a year target, so that's the struggles that we face in human aid department.

OK, and just on another note, the revenue for treatment that you accomplished this quarter was I guess 296, is that a number that could be sustainable, or is that going to go up or where do you kind of see that number trending towards?

Well, we've actually had the biggest increase for the year in the first two quarters, which typically reflects the way we raise prices, you know, a lot of our contracts come in on annualized basis towards the end of the year, but there's a percent that continues throughout the year, so you'll see that during the year, we'll maybe go up another Dollar or two in a quarter, but you won't see a large increase like you've seen today.

And in my final question is, have you seen any issues in reimbursement of in any of your markets? I know that there's been some talk that fiscal intermediator did not want to reimburse for at the rate that they should and instead of more of one of the cul-de-sac level.

Have you seen anything like that?

Let me try to answer that because I've been involved in that as I've told CMS at open door meeting in mid July, my day time job was to improve patient outcomes. My nighttime job now has become answering those different intermediates coming up with different rules and regulations. However I think at the moment my understanding, although some intermediate has tried to come up a rule that says patients need to start on all their medications before they can go and intervene us.

While others have said well, it doesn't matter what intervenes document deformation you do, we pay you the least costly alternative. Those two ideas have been put on hold while CMS evaluates this whole issue because there is now data that which is more expensive, does end up with much better patient outcomes. So, it's not the easiest rule to say well, we'll just pay you.

These drugs are not equivalent, these are not, and we're not talking about generic formulations. These are different drugs that act at different places and do result in different outcomes. At the moment the more expensive drug that these intermediates have been looking at does result from better outcomes based on data that SMC has analyzed in their own data set.

So, it's I think the regulators are beginning to realize that it's not necessarily the best thing for the medical beneficiaries to just come out with a blanket statement saying they'll for the least alternative, least costly alternative.

Arthur also, I'd like to ask Gary Brukardt to speak a little bit as we reflect back on your revenue per treatment and what we're going to do the rest of the year and our focus on that.

Yeah I think that many kind of answered to the questions that have been asked that one of the things we did at the beginning of the year is we created what we call a revenue management department and what we were able to do is we took a person who's had several CFO positions with managed care companies in the past and put all of that function under that individual. And so, with what we've done is, we've got multiple payers in intermediate areas, physical intermediate areas, we've got multiple shops where we build from and manage our accounts receivable now under all one person.

What that person also does is work very carefully with Ray and the medical department. He's got his fingers on the pulse of what's going on across the country from that prospective. So he took the managed care contracting people, they took the accounts receivable management people and put them all in a revenue management department who works very closely with the medical department to make sure that we are pro-active and stay ahead of these issues.

As you know there's been some consolidation in the manage care industry and we want to make sure that we stay ahead of that game and continue to effectively contract and know what's going in the state and national level and I think Ray and the folks that work in his department do a great job of monitoring that. We kind of put all that together in a process that I think helps us to better manage revenue.

But we're getting pretty good results with this approach.

Yes you are. Well thank you for that. I appreciate it, a great quarter.

Thanks.

Our next question comes from from Bank of America Securities. Please go ahead.

Actually this is Robert. Couple of quick questions. Can you assert to this better. Can you guys go over your cost components again that shrank EBITDA and give us the numbers again.

Yeah, let me pull that out. Basically and this is in everything, we're giving you the big issues.

Right.

One of the things that Ray mentioned earlier was our very successful medical meetings that occurred in May and obviously we do that every year. This year we had record attendance so that also added a little bit additional costs on our travel budget.

But the two main things that hit us was the fact that we had a nationwide recall in which is drug we use in our business and that increased our costs for treatment for the quarter about 50 cents a quarter.

As we mentioned that ought to continue for the next quarter or two, that probably effected numbers about 20 basis points and the other issue and we really didn't give amount, it's probably 10, 15, 20 basis points or somewhere there about is our insurance program.

Not only the costs of the insurance premiums going up but the additional deductibles and reserves that we put on the books to protect us because we try to be fully reserved up to our max mode exposure level.

And what was the effect the higher labor costs again?

Well higher labor was a six percent increase year over year as Gary mentioned to you we did have a sequential quarter where we actually moderated that cost to them

OK. One other question I had was one of your competitors mentioned that there're seeing a slow down of patients coming into SRD giving a better programs to identify at risk patients. Can you address that?

I'm sorry, identifying the one's before they come to ...

Right. Pre SDR patients.

That's an area that really is in the domain of the physician groups that have an impact on that issue. We have a very good relationship with those physicians but we don't have an active program to work with on patients before they come to the houses.

We sort of take them once they cross the door into the dialysis session. However, a lot of our educational efforts and many of our protocols are designed to make sure that those patients as they finally come dialysis are well prepared.

The biggest issue for example is to make sure they have a working access, a working blood access or you know at the time that they show up. We're also going to see whether we can work with CMS in removing the restrictions on having the patients come, bring down their to a level of 30 before they can be given I mean.

So these are the areas that we are continuing to work with our physician partners and in their practice.

But Todd just me let just get the bottom line to what Ray is saying as it writes to our growth rate.

Right.

We have not seen the emphasis on pre SRD in the industry slow our growth rate down as you can see I think this is the fourth consecutive quarter where we've had slight increases and that's due to not only obviously the fine clinical clear that's given by associates but also our program that you know about. Five quarters ago we put a renewed emphasis on.

OK.

So we're starting to see the fruits of that effort.

Thanks, what kind of sense to be attributing to growth can we use to project?

We remain comfortable with our goal of five to seven percent but if you really want to know we're probably going to be in the five point five to six percent range is where we would look to be.

OK and if I could just quote that so it's five point nine just to leave it right there.

Yeah.

OK, thanks.

Thanks.

Our next question comes from , from Pacific Growth Equities, please go ahead.

Yes, Dirk you mentioned that most of the properties out there in terms of your potential MNA active, your sort of in that 100 to 300 patient group size and you mentioned in an earlier discussion, leaving yourself in a position from a balance sheet standpoint to be able to take on debt, should opportunities arise.

I wonder if you could maybe give us an idea of, you know, what types of other, larger properties might be out there? I mean, are there sort of, those 1000, 2000 patient groups that you used to see in the past, that are still floating around out there and could at some point, be potential targets for you?

Al, there are some larger targets out there. There's one or two non-profit companies out there, there's a few private companies that maybe have anywhere, we have one that has about 4000 patients, and one with about 1000 patients.

So they are out there, and we obviously want to remain available, should they decide it's time for them to sell. The problem we have, as a company, is that we remain very conservative on our costs. And what we will pay for acquisitions, and so, when a company that we compete with for a price pays more than we're willing to pay, then it's going to be difficult at some point in the future for them to come around and expect us to pay more than they paid. So, we've got to be very careful with that.

So, while we do keep it available, there's not as many opportunities in the past. Now, you know, some of our bigger competitors may, at some point in time, decide they want to look at eliminating or getting rid of some patients, and maybe moving things around for various reasons, and again, we remain open for that.

OK. Great. That's helpful.

And then with regard to the turnover issue. I just wonder what the turnover looks like at, sort of, your ongoing center versus perhaps, more recently acquired properties? Is there any notable difference, or how notable is that?

It's hard to tell on the most recently acquired but, 'cause I don't have the historical data on those, but what we kind of feel is that you've got to provide these various levels of benefit, educational, learning opportunities for all the associates that work for us.

A lot of this starts with management, that's why our focus has been on the management development side, and we historically can tell, when we have good managers in facilities, our turnover rates are low. And our patients like to have a stable environment, so that's probably the single biggest thing that I try to focus on.

And, you know, there are some economic factors that are probably helping some of this. And we take advantage of that, in terms of, it doesn't do much on the license side, but it certainly helps on the non-license side. But, that's kind of the focus. And, you know, we've worked away at that, and as you know from what we heard a couple of years ago, we keep coming down with that number. And that's one of my goals for next year, is to continue to bring that number down.

So, is it at all the case that you have more difficulty holding on to people from newly acquired properties, or is there any ?

Well, there is some transition, you know, there are going to be some people that may leave the organization because of change.

I'm want to back up on this process a little bit too, because one of the things that I think we've refined a lot over the last six years that I've been here, is we've got a very good due diligence process, and the discussion that goes on between and operations, in terms of what we want to look at, how we want to transition it, how we want to acquire it, et cetera, makes - is very important to us.

So, I like the way we hand things off between one another, and the way that that process works. And we're going to continue, as Dirk said, to continue to be a disciplined buyer and make sure that we buy things that we can now integrate successfully into the company.

Yeah. The other thing, I think you know our style. There are two things that we do that really help the new associates feel more comfortable. We go through a lot of process of extending our benefits and our, you know, and those for the most part are not only competitive, but they tend to be better than other organizations, and the second thing is that we don't have a formula that says this is the number of nurses and number of technicians, that we need, we let, you know, we keep whatever we start with and then work with it, so, in the long term, there is no sense of insecurity that develops in these associates.

They know what their benefits are, we acknowledge their seniorority, and so, frankly, I don't have the numbers, but we go in and meet with them fairly early after the transmission and most of them are delighted to be part of this organization.

So, I don't have the numbers, but my sense is that, there is no big turn over, after a new acquisition, because of all the work that we do before.

And I think, we've done some very good acquisitions and I've been very pleased with the people that have come in to our company, every time we add an organization, we learn something too, and I've been very pleased with the folks that we've just made a part of our company, and, they always bring something to the process too, we learn as we go along, so, I think we are getting smarter at how we do that, and as I say, we'll stay disciplined with that and make the right acquisitions.

OK, and...

Yes, I just wanted to let you guys know, I told you Sam was a little under the weather and we expect him shortly, he just couldn't stay away from the conference call, so, he has now joined us.

I only show up when things are going real well, but I've had some health reports as far as my was concerned but unfortunately, the Van and Holy field must have been down, without a couple of weeks to go, and he pushed the door in my face, or something, so I fell and hit pretty hard and I've been a little busy.

OK.

But he's back in the saddle, and he's here leading us, so, we're in good shape.

Good to hear you on the call. One last question if I may, and this is probably one for Ray, you mentioned that the Medi-Care bill, was working its way from congress and that you were still hopeful about getting some increase for 2003 and the language there, given the limited calendar, and I don't know if you mentioned anything with regard to timing before, but sort of, what are the next steps in the timing relative to the process?

Yeah, the best, the best estimate I would tell you, is that the senate will deal with the provider issues, in September, that assumes that there will be some resolution, one way or the other with the patient medication bill, whether that will be resolved before the senate adjourns, it's not clear, but I think most favorable the details that they need to settle on that issue, one way or the other before they adjourn, they'll go back and they'll have a recess, the senate will have a recess in August, and then will be coming back immediately after Labor Day, and that's when we expect them to pick up the issue of provider, related issues and we are going to do a lot of work, both in the senate when they're in Washington, and also with the senators when they are back home.

We sent approximately 11,000 letters that were generated, not, you know, always had a letter and 11,000 letters were sent, 3,000 of them to the senate and we continue to have face to face meetings with Senior Legislator Aids, and the sponsors of the bill, as you know, is Senator Frisk and Comrade, and they are aware of the issues that involve, particularly with the physician, with the only physician in the senate being aware of some of these issues acting out of and we hope that it will help us in the final bill, so my expectation the senate will decide sometime in December, and then there will be a conference committee because hopefully it will be different than the house bill, and by October 1st we should have a final decision.

Great. Thank you gentlemen, and Sam, good to hear you on the call after all.

Thanks.

Ladies and gentlemen, is there any additional questions, please press the one followed the four at this time. Gentlemen, I'm showing no further questions. Please continue.

Thank you operator. Well once again, we appreciate your support of Renal Care Group, and your interest in our call and we will be talking to you again in the near future. Thank you.

Ladies and gentlemen, that does conclude your conference for today. You may all disconnect, and thank you for participating.