Fresenius Medical Care AG (FMS) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Renal Care Group's third quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a 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 Thursday, October 31, 2002. I would now like to turn the conference over to Mr. Sam Brooks, Chairman and Chief Executive Officer for Renal Care Group. Please go ahead, sir.

Thank you, operator, and good morning ladies and gentlemen. Welcome to Renal Care Group's earnings conference call. We are very pleased to report these excellent results that are in line with the projections we did over a year ago, for the third quarter ending September 30, 2002. Participating on the call with us today will be Gary Brukhardt, who's been our Chief Operating Officer since the conception of the company, and Ray Hakim, our Chief Medical Officer since inception, and Dirk Allison, the Chief Financial Officer of the company, who most of you know very well.

But first, we begin with Doug Chapel, our legal officer, who will give us the usual cautionary statement.

Thank you Sam. I just wanted to remind everyone that 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 Litigation Reform Act. These forward-looking statements involve known and unknown risks and uncertainties. Our actual results could differ materially from these forward-looking statements due to certain factors, including compliance with healthcare and other applicable laws, the integration of acquired companies, changes in the Medicare and Medicaid program, risks related to [EPO], payment reductions by private insurance, hospitals or managed care organizations, and changes in the healthcare delivery financing or reimbursement systems. These and other risks and uncertainties are discussed in RCG's reports filed with the SEC, including our annual report on Form 10K for the year ended December 31, 2001, and our quarterly reports on Form 10Q for the quarters ended March 31, 2002, and June 30, 2002. Dirk.

Thank you Doug. I'd like to indicate that our Chief Operating Officer will be the speaker right after me. That's Gary Brukhardt, and he's going to review certain operational aspects. But I wanted to briefly mention that he's going to discuss our Flagship II training program. We've been at this several years. We're particularly proud of it, not only because it increases morale, but it's been effective, effective in terms of operating costs and in terms of patient outcome. Following that, Dr. Ray Hakim will discuss our medical outcomes for the quarter, and bring you up to date on some specific government reimbursement issues, and then finally Dirk Allison our CFO, will present a detailed financial report on the company.

So now I'll just briefly share with you certain financial highlights, all of which you'll find in more detail in our press release. OK, for the quarter ended September 30, compared to the third quarter of last year, revenues increased about 20% to $231 million, and net income increased a little over 17% to $23.4 million, and earnings per share increased 18% to 46 cents per share. I'd like to compliment our more than 6,000 associates who've worked very hard on behalf of our patients, to continually reach higher goals in terms of quality, safety compliance, and who work very hard on behalf of our shareholders to meet the financial targets that we've set for ourselves. Gary, would you now elaborate on some operational aspects?

Right, thanks Sam and good morning everyone. I'd like to make a few comments just regarding operations for the third quarter, and I want to give credit to our operations management team and all of our associates for another solid performance in this quarter.

In reviewing our strong operating results, not only has revenue per treatment increased this quarter, our days in A/R, accounts receivable, are down thanks to a great job, an outstanding job by our associates in billing and collections. Now of course we never stop focusing on the expense side and our operating cost. Total patient care cost in the third quarter, excluding ancillary drugs, is consistent with the prior quarter. Of course the largest component of patient care cost is clinical labor. We continue to see productivity improvements in our in center hemodialysis product line, mitigating somewhat the wage pressures that exist in many of our markets. I really want to compliment our operating staff, and each associate, for the work that they do in making improvements in this area.

As Mr. Brooks has pointed out, we're continuing to work on our educational programs, and as you all are well aware of the national shortage of nurses, we too have experienced this challenge in certain markets. We've tried to address this issue by focusing on the education of our facility managers and our clinical staff. As Mr. Brooks pointed out, we had our Flagship training class, our initial one, Flagship I, where we trained over 350 managers, and now are launching in this quarter our Flagship II program, which will be a much more intensive program focused on situational leadership and other organizational management skills to further strengthen that group. What we like about that is the fact that we're starting to see a reduction in our turnover in our clinical management staff at the clinic level.

This entire effort is led by our education taskforce, consisting of representation from all across RCG's regions, and the corporate office. Our goal, as always, is to attract new associates, but probably more important, to retain and develop our existing staff. Another example, along with Flagship II, in our continuing effort to retain staff, in this past quarter something we're pretty excited about, we've piloted an e-learning initiative under the guidance of our taskforce, which we anticipate will accelerate the delivery of our training programs while improving consistency of those programs across the company. Obviously we want very highly trained staff working with our patients, and ultimately this leads to reduced training costs and in the end, better management of our overall labor costs.

In addition, we've supplemented local and regional recruiting efforts with a focus on recruiting highly skilled nurses internationally. We are starting to see the rewards of this effort, which started a little over a year ago, with the recent arrival of approximately 10 highly qualified, and I might say enthusiastic and very patient care focused, nurses from the Philippines, with another 20 scheduled to arrived before year end. But probably most importantly, we've worked hard to create a professional practice environment, which promotes a high level of professional satisfaction to our associates in the delivery of optimal care to our patients.

Now, how do we know if all of these initiatives have been a factor, or if they've worked? We recently conducted a survey of our approximately 6,000 associates. We were particularly pleased to learn that RCG scored the highest of the companies that are part of a large third party database. I think there's probably close to a million employees in one database, and about 300,000 in the other database. Where we came out, one of our highest areas was associates commitment to RCG's mission. I guess I find that very gratifying because when the company was founded, this focus on mission and vision was the key theme of our founders, and it was rewarding to see that was one of the results in our scores.

We also scored high in providing our associates an opportunity to simply do what they do best every day. People want to work in that type of environment. Of course, the survey identified some areas requiring improvement. To address these areas, we'll undertake over the next year, work unit specific goals and action plans, which will involve our associates and their managers, in order to further develop our associates and make RCG an even better place to work. We just want to be the best place to work for our folks.

I also want to point out significant progress that we've made in standardizing our information systems infrastructure, and in getting our information systems tools implemented throughout the company. As a result of our growth through acquisitions, we inherited, like others, multiple clinical medical systems and billing systems. Today essentially all RCG facilities, other than our most recent acquisitions, are on the same clinical records system, which is then interfaced with a single billing and collection system supporting our continued improvement in cash collections as we previously discussed. In addition, our human resources, payroll, general financial and inventory management systems are on a new single platform, and are integrated, which helps us better manage the labor and supply costs that we consistently focus on.

I just wanted to share with you our continued commitment to our most important resources, our human resources, and to assure you that our systems infrastructure is current, scaleable, and serves as a useful tool to assist us in better serving our patients, physicians, and enhancing the workplace environment for all of our associates. That ends my report; I'd like to turn it over to Chief Medical Officer, Dr. Hakim. Ray.

Thank you Gary. Good morning ladies and gentlemen. I'm really pleased to comment on a number of areas that we believe contribute, and are in fact an integral part of the financial performance that are in the quarterly earnings release, and which Dirk will comment on more extensively later, and also the operational improvements that Gary talked about. The first area I'd like to discuss with you is the medical outcome of patients served by RCG associates and, if needed, physicians. I also would like to comment on the regulatory and legislative efforts that I'm involved in.

As far as medical outcomes, I'm pleased to report that this quarter we have continued to improve on the percentage of patients who received the optimal dose of dialysis. This is expressed as URR or urinary reduction rate, and the minimum dose recommended by various agencies is 65%. But our medical advisory board has targeted a URR of 70% as optimal. Based on this higher target, I'm pleased to tell you that 76% of the patients received this high dose of dialysis, and because of our continued efforts in this area this is about a 4% improvement over last year. Using the target URR of 65%, which as I mentioned, is the minimum, more than 90% of our patients have achieved this dose of dialysis.

In terms of anemia management, we have maintained the percentage of patients with hematocrit of 33% at slightly greater than 77%, which exceeds the medical advisory board target of 75% of patients. This is a difficult to achieve target, and frankly it's hard 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 GMS acts on accumulating data that hematocrit between 36 and 39 do result in better patient outcomes, specifically reduced hospitalization and mortality.

During this quarter, working together with our associates and physicians, we were able to maintain hospital days at 12 days per patient here, which is more than two days below the national average of greater than 14 days. However during this quarter the mortality rate has also remained slightly below 21%, and our one-year rolling average mortality is down to 21.6% compared to the national average of 24.5%. So it's about 3 percentage points lower than the national average. We believe this difference partly accounts for the higher same store growth that we will be reporting.

Related to days of hospitalization and mortality, we have developed a pilot project in a number of facilities to address the high hospitalization and mortality of patients in the first 90 days of their life on dialysis. This pilot project, partly funded by a grant from Amgen, is called the Right Start project, and is a comprehensive evaluation and treatment of the patients as soon as they come to the dialysis units in an effort to improve their outcomes as soon as possible. While the number of patients participating in this pilot project so far is small, it is already showing some remarkably good results in terms of reduced hospitalization and better dose of dialysis and anemia control.

Next I'd like to comment on the regulatory and legislative areas. On the regulatory side I'm pleased to tell you that we continue to have an active dialogue with all of the regulatory agencies at CMS as well as with [Medpack] and the GEO office to discuss with them a series of issues that impact our ability to deliver optimal care to our patients, such as nutrition supplements, acid monitoring and daily dialysis, and also some accounting issues in terms of bed [inaudible]. We have also presented to CMS and [Medpack] an industry wide market basket formula that we hope will help them calculate an annual update to the dialysis composite rates. This was, as you know, due from CMS by last July, and we understand it's in the approval process. Having this market basket calculation will, I believe, facilitate our activity in congress, because instead of starting from zero every year we can start with the higher updates as hospitals do.

On the legislative side, as you may know, the house passed a Medicare bill that included no increase in the composite rates in 2003, and 1.2% in 2004. These are less than [Medpack] recommendations, and we are now working in the senate, and particularly with the Senate Finance Committee members, to bring this issue to their attention. The so-called lame duck session that is due to start on November 12 will provide us with another opportunity to talk to the Senators about this issue. Since the composite rate increase in the Senate bill, it is in the same bill that corrects physician payments, and has a lot of support across the political spectrum. We are hopeful that there will be a bill that will address the dialysis services updates.

As you may know the composite services update that is in the Senate bill is 2.4% in 2003, which is what [Medpack] has recommended. So basically we're really not giving up on this issue yet and we'll continue to advocate for it actively, until the President signs the bill. This concludes my presentation and as usual, I would be happy to answer any questions later on. Dirk.

Thank you Ray, and again, good morning. As we mentioned, earnings per share for the third quarter of 2002 were 46 cents, compared with 39 cents for the third quarter of 2001. This 17.9% increase in EPS was driven by improvements in collections, coupled with a reduction in the rate of growth of our patient care costs for the quarter. Third quarter revenues increased 19.9% to $231.5 million, as compared to $193.1 million for the third quarter of 2001. Our same market treatment growth of 5.9% year-over-year is within the range of our 2002 corporate goal of 5-7%. Revenue per treatment increased 5.7% to $298 per treatment, as compared to $282 per treatment for the third quarter of 2001 and $296 per treatment for the second quarter of 2002.

Patient care costs rose slightly to 65.5% of revenues in the third quarter of 2002, as compared to 64.7% in the same quarter of 2001. On a per treatment basis, patient care cost increased 5.9% to $196 per treatment, as compared to $185 per treatment for the third quarter of 2001. This cost increase is due mainly to the higher price for [EPO] that Amgen implemented for RCG on January 1, 2002. As you should be aware, Renal Care Group has been able to mitigate approximately 20-25% of that 3.9% [EPO] price increase by Amgen. In addition, early in the second quarter of this year Amgen announced another price increase in [EPO] of 3.9%. This latest price increase did not affect Renal Care Group in 2002, due to our current contract. We have an agreement in principle with Amgen concerning pricing for 2003, and we believe that we will be able to mitigate approximately 80% of this increase for 2003.

As we have previously discussed, our labor costs have been rising the past few quarters at a rate of between 5-6%. In the third quarter of 2002 our annualized labor increase was 5%. We continue to work hard in this area of cost control, however we are still feeling the affects of a nursing shortage in most of our markets. Along with [EPO] and these labor pressures, there were two other issues impacting EBITDA margins for the third quarter. First, due to a nationwide recall of Heparin, which we discussed on our last conference call, our supply costs for this drug were higher than normal. The manufacturer has now corrected the problem, and is reportedly back to full manufacturing capacity. Our cost for Heparin should return to normal levels by the end of the fourth quarter of the year.

The other issue affecting margin relates to our insurance program. As you are aware, insurance premiums have been increasing at a significantly higher rate than was anticipated when we prepared our 2002 budget. These higher premiums have negatively affected our EBITDA margins, and we believe that will continue into the foreseeable future.

Our general and administrative expenses remained at 8.5% of revenues in the third quarter of 2002, compared to the same quarter of 2001, while our provision for bad debts was 2.6% of revenues. EBITDA for the quarter was $54.1 million or 23.4% of revenues, as compared to $46.5 million or 24.1% of revenues during the third quarter of 2001. Again, our margins this quarter as compared to last year were negatively impacted by the higher cost of [EPO], the Heparin recall costs, and the higher insurance premiums.

During the third quarter of 2002 we continued our strong trend in cash collections. Operating cash flow for the quarter was approximately $50.5 million. As an update, we were able to collect on the remaining accounts receivable from the acquired Tupelo and Denver facilities that we discussed at our last conference call. These collections represented over $9 million in accounts receivable. I would be remiss if I did not congratulate our associates who work in our accounts receivable efforts. Your efforts are greatly appreciated, and I want to say thank you for your hard work.

Our balance sheet remains strong, with $39.8 million in cash on hand at September 30, 2002. We had no bank debt as of the end of the third quarter and our $2.8 million of long-term debt consists entirely of capital leases.

At September 30, 2002, shareholder equity was $538.3 million, and our annualized return on equity was strong at 17.3%. Day sales outstanding remained in excellent shape at 57 days, below our corporate target of 65 days, and 3 days lower than the June 30, 2002 figure.

Let me share with you an update on our stock repurchase plan. During the third quarter of 2002, the Company repurchased 1,298,700 shares of RCG stock, for a total purchase price of just over $40.4 million. We were able to do this without any bank debt outstanding at the end of the quarter. To date, we have acquired 2,278,100 shares, bringing our total spending to approximately $71.6 million. It is our intention to acquire an additional 200,000 to 300,000 shares during the remainder of 2002, and to continue to purchase shares in 2003.

However, let me once again remind you of the priorities as they relate to the Company's free cash flow. First, we plan on opening enough de novo facilities to approximately 1,000 patients within an 18-month period, subject to these new units meeting our earnings criteria.

Second, we will make acquisitions if we can find suitable transactions within our purchase price parameter of 4.5 to 5.5 times EBITDA. And finally, we will buy back our company stock if accretive. Despite closing no acquisitions during the quarter, we have already exceeded our 2002 corporate goal of acquiring at least 1,000 patients. Approximately 1,200 patients have been acquired year-to-date. Due to the current positive status of our pipeline, we hope to be able to announce the acquisitions of a few more patients before the end of the year.

For third quarter, capital expenditures were $19.2 million, broken out with $12.2 million being maintenance cap ex, and $7 million being investment cap ex. During the third quarter of 2002, our company opened four de novo facilities. This brings the total de novos opened in 2002 to 15 facilities, and we are still on track to open 18 de novos this year.

In closing, let me share with you our corporate goals for fiscal 2003. Our Hematocrit levels, as Ray mentioned, will be 75% of our patients over 33%, our urea reduction rate, 85% of patients over 70%.

Our revenues should be between $1 and $1.1 billion. EBITDA should be between $230 and $250 million. Our EBITDA percent should be between 23 and 23.5%. Our EPS should be between $2.05 and $ 2.08. We believe our same-market treatment growth will continue in the range of 5 to 6%, while our same-market revenue growth should be in the range of 9 to 13%.

We believe we will end 2003 with approximately 22 to 23 thousand patients, and our treatments should be between 3.1 and 3.4 million. Our targeted capital expenditures for 2003 will be $65 to $75 million, and our acquisition targets for next year should be between 800 and 1,200 patients.

Given the ongoing strength of our business and the effectiveness of our share buyback program, we are raising our earnings guidance for the fourth quarter of 2002 by 1 cent, to 48 cents per share. Again, I will be glad to answer any specific questions during Q and A. Sam?

Thank you Dirk, and operator, Liz, we're all four ready for question and answers now, if you'd care to switch to that mode.

+++ q-and-a.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-toned prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you are using a speakerphone, please lift your handset before entering your request. One moment, please, for your first question.

Our first question comes from Mr. [Darren Larrick], from SunTrust Robertson Humphrey. Please go ahead.

Thanks, good morning everyone. If I'm looking at this right, your acquisition guidance moved up a little bit for next year in terms of the number of patients. Is there a bigger group of assets you have your eyes on here? Or, is it still just the ones-ies and twos-ies?

Darren, we're still finding that our average number of patients per transaction is going to be 100 to 200 patients. That has not changed in the last year, basically.

OK. And then, if I could just go to some of the clinical stuff that you talked about, your experience with Right Start and to the extent that the mortality has dropped in the first 90 days there in the pilot that you have, could this possibly present some capacity issues? And, I guess, how do you respond to that with your capital? Are we looking at new builds, or expansions, or is it just too early to even be looking at that, at this point?

Well Darren, it would be a good problem to have, but again, although we are seeing success with the program, keep in mind it's a pilot project that we have an investment of people and IS systems and so on. So, we just need to see what will work, and then how we can expand it across the system.

So, I think if I may say so, it's a little bit premature for us to start increasing our capacity based on these outcomes that are good, but are still preliminary. And I'm sure Dirk will go along that, if we have that problem, we'll address it very nicely.

Yeah, and Darren, just to comment on our capacity today, we're at between 60 and 70% capacity. Now, that's not true in every unit, because there could be some certificate of need states, where we're a little higher than that. But, we feel confident that we have the ability in current areas to handle the growth that we expect from this program.

OK, and just two quick housekeeping items, if I could. I'm sorry I missed the operating cash flow number in the quarter, if you'd just repeat that?

$50.5 million.

OK, and then, Ray, the incidence of diabetes in the quarter, is that something you're able to provide us?

We don't track down those specifically for our facilities, but we know nationally, it's somewhere in the range of 45 to 48%. I can give you more specific numbers, but those are the numbers that I remember from some of the data.

Great. Thanks very much.

Our next question comes from the line of Arthur Henderson, from Jeffries. Please go ahead sir.

Hi, thank you. Dirk, could you explain why interest expense went up in the manner that it did, during the quarter?

Sure, there are two main reasons. One is, we redid our bank line of credit. We extended the maturity out three years. Basically, we decided to go ahead and write off $300 thousand of loan origination fees from the first time we did the line of credit. So, that's probably, what, 60% or thereabouts of the interest for the period. That's a one-time issue.

The other issue, Arthur, relates to the fact that, if you'll remember, we bought $40 million of stock this quarter. And, you know, probably 60, 70% of our money comes in, in the last 10 days of any particular month. We buy ratably generally throughout the month. We will actually use our line of credit for those stock purchases early in the month, and then pay it off at the end of the month. So, we do experience a little bit of interest expense while that transaction's occurring.

OK, so going forward, we should expect to see that interest expense on a quarterly basis, to go back to kind of where it was?

That's exactly right. The $300 thousand will only be for this one quarter.

OK. I have a couple other things. The DSO sustainability, obviously that contributed greatly to the strong operating cash flow. Do you see that as being a level that you can continue to operate at? Or, is there improvement, additional improvement? I mean it is pretty, very good.

Well, I will tell you this. We have some of the best, if not the best, associates in the industry on collecting cash. I think you can see that if you compare us to industry averages. These folks, every time you challenge them, continue to exceed our expectations. So, I will tell you, we're comfortable at the level we're at now. Do we think it will go down a lot more? I'll be honest with you. We're the lowest in the industry, so we're not expecting that.

But, we think this level, you know, 55, 60 days, a little plus, is sustainable, into the future.

OK, and then, Ray, if you could comment a little bit more on the legislative? Now, as I understood you to say, the house did not include a provision for a composite rate increase in 2003, in the House bill.

Correct.

The Senate included, well, the Senate provider package as it stands, it obviously hasn't received unanimous consent yet, but contains a 2.4% increase.

That's correct.

And, we're heading into a lame duck session, which I guess some of the motivation to get something done is going to change a little bit from where it was prior to adjourning. What is your sort of honest outlook as to what the chances are of being able to get something in 2003? Yeah, in 2003?

I think even in the lame duck session, because the composite rate increase is part of a provider package that includes physician payments corrections, I am still frankly hopeful that something will be done. I think it's an issue that everybody agrees, from the White House to the older legislators independent of affiliations, that needs to be corrected and have heard a lot about it from the physicians. So, I believe even in the lame duck session there will be an attempt to have a provider bill passed in the Senate that will include the composite rate increase.

Frankly, we have--everybody we talk to has said that our case is well done and well justified. So, I will tell you, in terms of the Senate passing that bill, I'm hopeful, probably more than 50%. In terms of what happens in the conference committee, when the two sides get together and hammer out the budget, that's where all bets are off. But I think even the house leadership has heard our case and hopefully they will be willing to step up to the senate number, rather than come down to the house number.

It depends a little bit on how much the house, sorry, the White House sort of puts pressure on getting a certain budget. But I suspect they will go along with whatever those two sides agree on. And frankly, there are also provisions, in which that 2.4% can be attenuated by any number of technical issues that they can fix, NSB extension, and so on. So, I'm an optimist and I'm optimistic, but I think it's likely to happen.

OK. One last question and then I'll jump out here. Dirk, could you maybe give some commentary on private payer rate increase, or commercial payer rate increases for 2003?

Sure. We have pretty good visibility at this point in time, and we think those rate increases are going to average 8 to 12%, and that's what we have in our projections, going forward.

And, the share repurchases, do you have a sense as to what you might look at for next year?

I will tell you that we, as the management team around this table have looked at it, we would like to spend up to $70 million a year, acquiring our stock.

OK, great. Thanks a lot. I appreciate it.

Our next question comes from the line of Ryan Daniels, from William Blair. Please go ahead.

Thanks, this is John Krieger with Ryan Daniels. Dirk, just to follow up on that, does your guidance for next year require that you buy about $70 million worth of stock back?

John, it is not required. As you are aware, I know you've follow the company for a while, we have what we call three or four levers we can pull. Those levers relate to the price increases we get, the government price increases, what we can do with [EPO], as well as what we can do with our cash.

As we give you the 205 to 208, we have not necessarily programmed in that we're going to buy all of that $70 million back.

OK, great. A question for Ray, can you give us your latest thinking on reuse, if it's changed at all? I know [Frizenias] continues to talk a lot about the opportunities with single use [dialyzers] and I think they actually talked about some clinical data indicating a mortality improvement with single use.

Can you give us your view, and whether or not this issue comes up at all, in your discussions with CMS?

In answering your last question, the issue has not come up with CMS at all. And, going back to the original question, as you know, we have looked at--so far, there is no published data that says that, on average, reuse facilities have different outcomes than single use facilities. However, there is some noise in the background, and we have decided to do a pilot project, in which we converted certain facilities for a temporary period of time, to single use [dialyzers]. And, we are following the outcomes of these patients in terms of hospitalization, mortality and everything else.

At the moment, we don't see that change, but it's perhaps too soon to see that in terms of mortality. [Frizenias] has been at it for longer and maybe that's when they start seeing those changes.

We, at the moment, don't have the evidence that says single use does lead to reduced mortality. And that's the statement, or that's the position that we have, that's consistent with what's been published in the literature. Now, it doesn't mean we cannot see it later on. At the moment, we just can't see it, but we're going to keep trying. I think we have approximately 500 patients in that single use program, and we're trying to see whether we can see a difference in the pattern.

I have to tell you, economically it's still a very hard switch, because there is, at the moment, on the basis of the price that we have, for a single use product, it still is not economically mutual for us to switch facilities. But, we're willing to try that and see and then put everything into the equation and come up with the best answers.

Thanks very much. One quick follow up, is mortality the right question to be asking? Or should we also be thinking about morbidity from when you switch to a single use?

Yeah, we follow both hospitalizations as an index of morbidity, as well as mortality. We get that data from every facility every month, and then aggregate it every quarter. But it's just--keep in mind, because you already have a very sick population that has a high mortality rate, one factor like going to single use, may not impact that high mortality appreciably. But we're tracking that, as well as hospitalization.

Thanks very much.

Our next question comes from the line of Mr. [Dax Blassis], from ESF Value Fund. Please go ahead sir.

Yes, I was wondering, what do you expect for cap ex in the fourth quarter?

Year-to-date, we probably will spend between $12 to $17 million or thereabouts in the fourth quarter.

OK, and then, on the minority interests, it doesn't seem that you've really paid out that much cash. Do you expect a material cash payment in the fourth quarter?

Well, let me explain that. We are a company that likes to grow, and we like to not only do acquisitions, but do de novo units in markets in which we operate. And because of that, a lot of our joint venture partners want to maintain the cash in our partnership until we spend it for those investment opportunities. So, because of that, if you look back over the last three or four years, you can see our cash flow out to our partners, or our distributions, remain relatively constant, quarter-to-quarter. So, we're not expecting a tremendous fourth quarter distribution, much more than we'd normally do.

OK. And, what would you expect for minority interests, or what is your estimate of minority interest from a P and L standpoint, for to get you to the 205, or your EPS guidance for 2003?

You're going to maintain a 2.3 to 2.4% minority interest, right around there.

2.3 to 2.4% of revenues?

That's correct.

OK, and as far as I understand your restricted payment and your bank deal, it was $100 million that was the carve out for share purchases through the term of the bank deal, and you purchased 40 million under that, these are my calculations, I don't know, maybe you could help me out with that. But you repurchased 40 million, would you need a bank amendment for additional share repurchases to get you to the potentially 70 million that you're talking about for 2003?

To get to the $70 million for '03 and the $70 million for '04 that we've been talking about, you will need a bank amendment as well as a board approval, and we expect that to occur in the near future.

OK, and then assuming, I guess from what you said, you spent I guess already this quarter, about $8 million on share repurchases?

Not quite $8 million, we spent right at $6 million so far in the fourth quarter.

OK, so assuming you buy back the other 200-300,000 shares and no acquisitions, where would you expect your cash to be at year-end?

I'll be honest with you; I would have to run that number, that's not one I have on the top of my head. If you want to give me a call afterward, I can give you that number.

OK, thanks a lot.

Our next question comes from the line of [Mr. John Ramson] from Raymond James; please go ahead.

Hi, I'm just trying to get a little more break out of the growth in patient care costs Dirk. Could you break that out? It looks like the adjusted for volume patient care costs grew about 15.5% in the quarter, which is pretty consistent with where it has been. But how would you break that out between labor, [EPO], and some of the other factors that you mentioned?

You're talking year-over-year, John?

Yes.

Labor went up about 5% year-over-year, however I have to compliment Gary and his team. For the last two or three quarters that labor increase has been reduced, and I think as you see future quarters, if that trend continues, you will see that 5% come down some. But you did have that 5% increase on labor, and then we also experienced, as you're aware, that 3.9% [EPO] increase year-over-year, of which about 3% or 300 basis points of that number did actually hit our cost line. We were able to mitigate 20-25%. Then the other factor relates to the supply side of our business, and where we've seen issues there relate to things such as heparin, and items like that. Then also remember there are certain insurance costs that are pushed into the patient care line, and you're seeing that increase also. So those would be the top three or four items that affected that.

Well I mean, I guess I didn't ask the question the right way. Let's say that we're talking about a 15% increase, and then the dollar amount being about roughly $25 million. So we take out the 5% volume, or 6% volume. If we were to look at the top three in terms of dollar increase in cost in order of magnitude, would it be labor, [EPO] and supplies in that order?

Yes, it would be. If you look at it on a per treatment basis, which we tend to do, we manage per treatment to take out the volatility of growth, or the change in growth, we went up 5.9% year-over-year. So when you realize that of our patient care costs, labor makes up 40%, you can kind of work down and through and see you've got your labor cost going up at 5%, and then we've got the [EPO] cost going up 3% and then supply costs. So you had the right order, and you can kind of work through the magnitude with those numbers.

As we look out into '03, do you see patient care costs staying about 65% of revenues because of the factors around [EPO] and insurance that aren't likely to change much?

We do. We feel that we're in a pretty good range, 65-65.5%, somewhere in there with patient care costs going forward.

OK. So I guess it's fair to say then that for the intermediate term certainly big checkmarks in terms of revenue growth, volume, free cash flow, but there's probably not a heck of a lot of, at this level of EBITDA margin there's probably not a heck of a lot of operating leverage left in the business. It's sort of going to trundle along at these pretty good levels, but probably not going to get much better for a while.

That would be true John. We obviously continue to work all the time on trying to bring down additional cost. We hope as we continue to grow that you'll see a slight reduction in our G&A as a percent of revenue. But we're really, that 23-23.5 is the range we feel pretty comfortable with.

OK, thanks very much.

Our next question comes from the line of [Greg McKosko] from Lord Abbott; please go ahead.

Thank you. Could you talk a little bit about insurance on an absolute basis? Kind of what is the insurance cost, and what did it go up for the quarter?

Greg we haven't given out absolute dollar amounts for various reasons. I will tell you that it went up probably 30-40% higher than we had anticipated in our budgets that it would go up.

And that will continue on then, those kinds of numbers should be that much higher going forward. Is it ratably done kind of throughout the year?

Well we have one or two policies that are done through the year, but basically it's done toward the end of the first quarter, towards the beginning of the second quarter. So you won't see our absolute dollars increase much between now and the end of the first quarter next year, but those higher dollars are now in the base of expenses going forward. So the question becomes, what happens next year in the first quarter when you renew your insurance programs? The good thing is we learn from history and we're anticipating this year, I think we have a little better knowledge in how to budget our insurance costs for next year.

OK. With regard to the buyback and use of cash, etc., has there been any discussions of dividend with regard to the board and management?

Let me comment. We kind of look at the buyback as an efficient, tax efficient dividend method. So no, the board would rather see a stock buyback program than a dividend program, and we have no discussion on the agenda for a dividend for this company.

OK, good. And the finally, with regard to the additions of patients this year, it looks as if we're going to have sort of an above average year with regard to patient acquisitions.

It's certainly above what we expected last year, correct Greg.

OK so those patients as they work into the system, etc., I guess it's fair to say that as they are part of the system they add to the top line growth overall I would assume.

That's correct.

OK, thank you very much.

Our next question comes from the line of Mr. Kip Hewitt from Legg Mason; please go ahead.

Yes, thank you. Dirk, when you mentioned the commercial price increase, I think you said 8-12%. The bottom end of that range is what I've heard you say in the past. Am I correct that maybe you're looking at some improvement in the pricing environment on the commercial side? Reflected in the top end of that range? Or it could be my records are just not accurate here.

Well Kip, I wouldn't comment on your record, you're generally pretty good at that. I will tell you that we now have great visibility, in fact we have visibility. We believe that we will be in that range, and probably toward the high end of that range. As you know, insurance companies, HMOs, managed care players, they've got good increases going to the employer base, and we're participating in that this year.

OK. Is there anything changing in the nature of what the employer is demanding, or the insurance companies are demanding, as a trend other than just we're looking at the price environment, but anything, any controls, restrictions, terms etc., that's changing the insurance environment for you?

No, I think the one thing that Renal Care has going for it, and we've had since we were founded, is the principles we were founded on. Quality of care is an absolute mantra of ours, and I think healthcare managed care payers, they look to providers to give good quality care, and they're willing to pay for that. So I think that's fit very well in our ability to get these price increases.

OK, and then just a final question, also related to the pricing environment. On the Medicare side, any sense of a change in the sentiment for the lame duck session on these bills? I think you've generally said more likely to see some rate increase that would occur in 2004, though conceivably in 2003 on the composite rate. But since your last quarter, have you detected any more positive or more negative sentiment relative to the rate increase?

Well we, since the last quarter, we really concentrated on the senate side, because the House had already passed its bill, and we remain optimistic that at least the sponsor of the bill, we met with the two sponsors of the bill in the Senate, and they are still clearly hopeful that they can make an argument for including the [Medpack] recommendation from the senate version. And then it comes to the conference committee, and that's a lot more subject to what the White House says and how much they press. So we are also working on the house side to make sure that their estimates or their provision goes up to the Senate bill rather than come down to the House bill. Again there seems to be more understanding of the issues that we face in terms of providing care to Medicare beneficiaries.

So are you saying then that the potential for an increase to begin in October '03 is still very much alive at this point?

I think it's alive, and I would rate it as slightly better than 50%. But still you know with the political things going on in terms of the potential war in Iraq, the budget deficit, all of these things, and the lame duck session by its nature makes a lot of wild cards in that mix. All I can tell you is we as an industry, and certainly RCG is doing the best job of advocating for our cause and for the fact that we do need an increase to provide services for Medicare beneficiaries.

OK, thank you very much.

Ladies and gentlemen, once again as a reminder, to register a question, please press the one, followed by the four. I'm sorry sir, go ahead.

This is Sam Brooks, I was going to cut it off if there were no more questions, but I thought you had signaled there might be one more.

Yes, we do. [Mr. John Ramson] from Raymond James, please go ahead with your follow up question.

Hi. I promise I'll keep this short. Just two quick things. The last question on cost, if labor is 40% of the total patient care cost and it's growing at 5% adjusted for volume, and your total costs are going 15%, that means that the other 60% of your costs are obviously growing a lot faster than the combined 15%. I went to Georgia, and we're not that good with math but is that accurate? And would the largest growth still be the insurance cost that you referenced earlier?

John, I'm from Louisiana, so Georgia probably beats me. But I will tell you this; I'm not sure where you're getting your 15% number. That may be the cost growing including volume growth.

Well what we did is we took the year-over-year cost and then we subtracted out 5.9% for volume. So the year-over-year cost grew by a certain percentage, then we adjusted that for volume. So we came up with kind of an apples to apples cost growth of about 15%. But that may be the wrong way to go about it.

Why don't you call me offline and we'll walk through that. Because in our adjusted for growth numbers, we went up 5.9%.

Total cost?

Our patient care cost.

Patient care costs were up 5.9, OK.

That's correct.

All right, we may not be factoring in acquisitions the correct way or something.

That's fine, just give me a call and we can go into more detail.

Then on the reimbursement side, are you sensing any, what is, since the conference committee is going to be subject to what the Bush administration is saying, what kind of signals are you getting out of Scully or CMS on the administration's position about dialysis? Because they've been sympathetic toward some providers and not so sympathetic toward others.

I don't know that they have focus on that issue, either from the White House, or from Secretary Scully, from Mr. Scully's view. So I do not know that they have any specific views on the House composite rate. They do have views on the overall budget package, and we are trying to address that by showing them ways in which the increase can be mitigated in terms of overall Medicare costs. So where all of that will end, and incidentally that was a proposal that we had made early on. So where that will end, I'm not sure. But we are, as I said, working at it and optimistic.

Thank you very much.

Sure.

Our next question comes from the line of Gary Lieberman from Morgan Stanley; please go ahead sir.

Hi, I'll keep this one quick too. Labor throughout the industry seems like it's continuing to be tight. If you could just briefly comment on your experiences. Is it tight, has it gotten better? What's the story?

This is Gary Brukhardt. That's a complicated question by market. Certain markets we see more labor pressure than other markets. I mentioned earlier some of the things that we were doing to try to mitigate some of that. We constantly focus on productivity. As I said in an earlier call, some of our distribution of our units allows us to have less labor issues. We're in a lot of smaller markets, less competitive markets than some other companies might be, and that helps some. But we're feeling those challenges and pressures, and we do a lot of different things. A lot of efforts in terms of education, a lot of various specific tactics to try to address that issue. But it's a continual challenge for operations, and I'm pretty proud of the fact that we're able to keep our labor cost under a great focus. So there's no simple answer to that Gary, it's a complicated process and it's market specific. I don't know if that helps any, but it's not going away immediately, and it's something as operators, we deal with all the time.

All right.

Gary, because of the labor mix in a particular facility, which we are not as dependent on nursing as hospitals in general, it may mitigate also some of that.

Ray by nursing, you mean RNs?

RNs, yes.

Licensed staff and we're also working hard on certification of our technicians to make sure we have a very good workforce out there, and I'm very proud of what's been accomplished in that area. So all of this impacts the overall labor picture and there's a lot of moving parts to it at any one time.

OK.

Our next question comes from [Depak Cana] from Lord Abbott; please go ahead.

Hi guys, great quarter. Quick question, FDA just approved a home dialysis machine made by Axis Pharma, and they're saying that the outcomes for daily dialysis is better than getting it done three times a week. I was just wondering what your thoughts are on this front?

We are talking with Axis about a way which we can test that hypothesis. I think I would keep it as a hypothesis. But frankly, the biggest issue is the fact that most fiscal intermediaries do not reimburse for dialysis at a greater frequency than three times a week. Under that restriction it would be very hard to see that become an important way of delivering dialysis for home patients. So we're watching this, we want to test the system in some of our facilities first. Although it's designed for home use, we want to check it out to make sure that the reliability of the machine is appropriate and so on. So we are interested, we are looking at it, but at the moment we don't see it as a major component in our facilities, or in our services.

So the biggest barrier you think is the reimbursement, rather than the efficacy?

I would say the reimbursement is certainly the biggest one that will allow us to test the efficacy. I know there are some studies, and I follow those, that have pointed back to improvement in patient care in terms of what they do in terms of anemia management, phosphorus control and so on. But none of the studies are large enough to say the patients do better in terms of mortality and hospitalization. So we need to keep that in mind as we evaluate this product and this technique. And again I would say it's become reimbursable, certainly the ability to use existing technology to do daily dialysis is also available. So we think we would be able to respond very quickly if the reimbursement is correct, to evaluate this daily dialysis.

Great, thanks. And just one last thing. Dirk, could you break out by any chance, maybe I missed it, what were the units utilization per patient per month?

I'm sorry, Depak, what were you asking?

Utilization of [EPO] per patient per month.

Oh, well I can tell you that our average units per patient were 5,400 units.

And is that up or down?

That is actually, for the last five quarters, consistent.

Great, thanks so much.

Well, thank you ladies and gentlemen. This has been a great question and answer session. We appreciate your interest and it's quite obvious you're bosses are really after you to work hard. That makes it harder for you and harder for us, but we do appreciate it very much. And, all our shareholders appreciate your good work.

So, we'll sign off for now, operator.

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