Fresenius Medical Care AG (FMS) 2002 Q4 法說會逐字稿

Good morning. Welcome to the Renal Care Group fourth quarter and year-end 2002 earnings conference call. At this time, I'd like to inform you that this conference is being recorded, and that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation. I would now like to turn the call over to Dr. Harry Jacobson, who will moderate today's conference. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to Renal Care Group's earnings conference call. I'm Harry Jacobson, vice chairman of the board of directors of the company, and I'm sitting in for our chairman, Sam Brooks, who's not feeling well. We are pleased to report excellent results both in terms of medical outcomes and financial performance for the fourth quarter and the year-ending December 31st, 2002. Participating with me on the call today is our chief operating officer, Gary Brukardt, our chief medical officer, Ray Hakim, chief financial officer, Dirk Allison. Let's begin with Doug Chappell, our general counsel, who has the usual cautionary statement to make regarding any forward-looking information.

All of the information we provide and discuss in this call is forward-looking information and is given in reliance on the safe harbor litigation reform act. These forward-looking statements involve known and unknown risks and uncertainties. Our actual results could differ materially due to certain factors, including management succession and dependence on executive officers, compliance with health care and other applicable laws, the integration of acquired companies, changes in the Medicare and Medicaid programs, risks related to EFO, payment reductions by private insurers, hospitals or managed care organizations, and changes in the health care 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 10-K for the year had-ended December 31, 2001 and our quarterly reports on form 10-Q for the quarters ended March, 2002, June 2002 and September 30, 2.

Thank you, Doug. Let me now introduce the others and give the order of today's remarks. Our chief operating officer, Gary Brukardt, will review certain operational aspects of the company, and then our chief medical officer, Dr. Ray Hakim, will discuss the medical outcomes for the quarter and bring you up to date on legislative issues, and then finally Dirk Allison will present a detailed financial report on the company.

Let me begin by sharing with you the financial highlights for the quarter, and year-end that you will find in more detail in our press release. For the quarter ended December 31st, 2002, as compared to the fourth quarter of 2001, our revenues increased just over 19% to $243 million. Net income increased over 20% to 24.9 million, and earnings per share increased 25% to 50 cents per share. For the year ended December 31st, 2002 as compared to 2001, our revenues increased 19.6% to 903.4 million. Net income increased just over 20% to 92.5 million, and our earnings per share increased 19.7% to $1.82 per share. The number of RCG associates now is over 6,500. Each person works very hard on behalf of our patients to continuously reach higher goals in terms of quality, safety and compliance. Their combined efforts are reflected in these fine financial and operating results for the period. And now I'd like to turn it over to Gary Brukardt, who will elaborate from the operations perspective. Gary?

All right. Thanks, Dr. Jacobson, and good morning, everyone. I'd like to preface my remarks regarding RCG's fourth quarter and year-end results by thanking each and every associate in our management team for an excellent quarter and year. Dr. Hakim and Dirk will report in detail on the clinical and financial results achieved by our team. But I'd like to share with you a few key initiatives undertaken by management to accomplish these excellent results. One of our primary initiatives was to organize the revenue management function under a single person and department. The goal was to grow net revenue per treatment and to continue our strong position in accounts receivable management. With respect to revenue for treatment, we focused specifically on managed care, commercial, and our acute contracting initiatives.

With respect to accounts receivable management, we focused our efforts internally on the patient registration process, billing and collections processes. The -- to support these critical functions, we consolidated on a single revenue management information system. We believe these changes have effectively positioned us to respond to increasing pressures for managed care payers. Another reason for our reorganization in 2002 of the revenue related management functions was to allow our management team to intensify our focus on costs. In 2002, we continued our focus on productivity improvement as reflected in the fact that our in-center labor productivity improved nearly 3% quarter over quarter.

We continue to work on improving our processes -- our management reporting tools, and developing system solutions for what were previously manual tasks. We are especially pleased that we've been able to achieve these productivity improvements while continuing to improve on the quality of care we provide to our patients. This has always been our mission and vision at Renal Care Renal Care Group. Supporting our productivity improvement efforts, we have reduced turnover company wide. Our annualized turnover rate at the end of 2001 was 29.2% at the end of 2002, it was 27.2%.

However, I'm pleased to report that several of our markets are now experiencing turnover rates in the 15 to 20% area on an annualized basis. Although we are people-driven business, an equally important 2002 initiative was improvement of our supply chain management and hemo (ph)-dialysis supply costs. We reviewed product offerings across the company and reduced our corporate inventory master from roughly 7,000 items to less than 2,000 items. And I'm proud to say in selected markets to less than 350. This resulted in the right product offerings to ensure optimal care and also led to fewer items available, helping us to stabilize routine supply costs for treatment.

Concentrating our products with fewer vendors further supports our supply cost management efforts. I would like to emphasize, however, that price is not the only variable in considering product selection. The products improvement in the quality of patient care is essential. Physician preference, and associate acceptance are important considerations as well. In addition to these revenue and cost management initiatives, we focused on internal growth, de novo development and our medical staff development. 20 de novo facilities were established in 2002.

In addition, we assisted our affiliated position and replacing retiring physicians, adding new physicians to their practices and to our overall medical staff. This resulted in over 31 physicians placed in 2002, 11 of which represented net additions to our active medical staff. Our physician engagement strategy is paramount to our ongoing success. I'd also like to take just a moment to highlight renal lab's successes as we disclosed in the January release.

Renal lab was awarded re-accreditation by the commission on laboratory accreditation of the college of American pathologists. This is a very rigorous review process that carefully examines all aspects of laboratory operations a perfect score was achieved. Renal lab also received special recognition as a 2002Roche diagnostic center of excellence. Renal lab was one of nine clinical laboratories across the nation chosen for the award in recognition of its exceptional quality in the pursuit of excellence.

We are honored to be in the company of some of the most prestigious clinical laboratories nationwide. In 2003, our continued success will be to sustain the current culture, hire and retain the right people and place them in the right position. We will continue to reinforce our values by providing enhanced education and training of associates at each and every level of the company. But the ultimate goal of performing at the highest levels our patients and shareholders have come to expect. I'll be glad to answer any questions during the question and answer portion of our presentation, and I'll now turn the program over to our chief medical officer, Dr. Hakim. Ray?

Thank you, Gary. Good morning, ladies and gentlemen. I'm 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 and annual earnings release. And which Dirk will comment on more extensively later.

The first area I'd like to discuss with you is the medical outcomes of patients served by RCG and our affiliated physicians. I would 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 have been able to maintain the high percentage of patients who receive the optimum dose of dialysis. This is expressed as URR, urea reduction rates, 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 patients received this high dose of dialysis. And because of our continued effort in this area, this is about a 4% improvement over last year.

Using the target URR of 65%, more than 91% of our patients have achieved this dose of dialysis. The percent of patients achieving the URR of 70% this quarter is not different from last quarter. This reflects the fact that the new acquisitions of approximately 425 patients needs more time before they can meet the RCG outcome goals. We believe these percentages will continue to improve, albeit slowly, as we introduce more efficient dieizers (ph) and ation as we continue to reduce the amount of patients with catheters across all of RCG. In terms of anemia management, we have maintained the percentage of patients with hemacratic (ph) over 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 is hard to exceed it without running into regulatory issues by the fiscal intermediaries who focus on the percent of patients who exceeded a hematocrit of 36%. We'll probably not see much of a change in this number unless they act on accumulating data that hematocrit between 36 and 39 do result in better patient outcomes.

During this quarter, working together with our associates and physicians, we were able to maintain hospital days at 12 days per patient per year, which is more than two and a half days below the national average of 14.4 days. This 12 days is also 3% lower than last quarter. This is the first year that we did not see an increase in the fourth quarter hospitalization that we usually see because of the winter months. And we believe this reflects the focused attention to flu vaccination that the patients and our associates participated in. Finally, our one year rolling average mortality is down to 22%, compared to the national average of greater than 24%. We believe this difference partly accounts for the higher same store growth that we'll be reporting. Again, we expect this number to slowly trend downward as we integrate the new acquisitions.

We are continuing several projects to improve patient outcomes. As I mentioned in the last call, we have developed a pilot project in a number of facilities to address the high hospitalization and more mortality of patients in the first 90 days of their life on dialysis. This project called the Right Start is a comprehensive evaluation and treatment of the patients as soon as they come to the dialysis facility in an effort to improve their outcomes as soon as possible. While the number of patients participating so far is small, it's already showing some remarkably good results in terms of reduced hospitalization, anemia control, and dose of dialysis. We also expended our efforts in the care of diabetic patients, which comprises approximately 50% of our patients. And again, the early indications are very encouraging in terms of reduced amputations and hospitalization.

Finally, starting next quarter, we are going to increase our focus on the home treatment modality, both TD and home hemodialysis. This type of therapy not only empowers patients to self-care, but reduces our need to build new centers and expend capital on bricks and mortar.

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 dialog with CMS and Medpack (ph). With CMS, we are pleased that Tom Skully has designated a person to coordinate the various bureaus that deal with -- within CMS. We are also pleased with CMS's publication, the Federal Register, of their new policy that will even the field across all health care facilities. This is an area in which the renal leadership council and RCG have been very active.

Finally, we understand CMS has finished market for SRD and are awaiting the secretary's approval before it is sent to Congress as requested legislatively. Heading this market basket calculation will, I believe, facilitate our activity in Congress because instead of starting from zero baseline, we can start with the true increase in cost of providing dialysis services. With medpack, we also continue to maintain an active dialog and although we are pleased with the calculation of the 2.5% increase in market basket for ESRD, we continue to discuss with them the application of a productivity offset factor across the board for all providers.

On the legislative side, as you know -- spending bill finally passed Congress included only a reversal of the cuts in physician payments, and did not provide any effective provider relief. The Renal Leadership Council along with -- medical care, which is not officially a leader of the management, joined together to focus our efforts to obtain legislative relief in 2004, and the application of the market basket update on a yearly basis, as is the case for other health care providers. We are working with several legislators to introduce bills in favor of the annual market basket updates. This concludes my presentation, and I'd be happy to answer any questions, but for now, I will turn it over to Dirk Allison. Dirk?

Thank you, Ray. Good morning. As Harry mentioned, earnings per share for the fourth quarter of 2002 was 50 cents per share compared with 40 cents for the fourth quarter of 2001. This 25% increase in EPS was driven by continued improvements in our operations as well as by the success of our stock repurchase program. Fourth quarter revenues increased 19.3% to 243 million as compared to 203.7 million for the fourth quarter of 2001. Our same market treatment growth of 5.6% is within the range of our 2002 corporate goal of 5 to 6%. Revenue per treatment increased 7% to $305 per treatment as compared to $285 per treatment for the fourth quarter of 2001, and $298 per treatment for the third quarter of 2002. Patient care costs were down slightly at 64.8% of revenues in the fourth quarter of 2002, as compared to the 64.9% in the same quarter of 2001. On a per treatment basis, patient care costs increased 7% to $199 per treatment as compared to $186 per treatment for the fourth quarter of 2001. This cost increase is due mainly to higher prices per EPO than Amgen implemented for RCG on January 1st, 2002. As you should be aware of by now, Renal Care Group has been able to mitigate approximately 20 to 25% of that EPO increase by Amgen for 2002.

In addition, early in the second quarter of 2002, 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, but the price increase did become effective for us on January 1, 2003. We have an agreement with Amgen concerning pricing for 2003, and we believe that we will be able to mitigate approximately 80% of this increase. As we have previously discussed, our labor costs have been rising the past few quarters at a rate of between 5 and 6%. In the fourth quarter of 2002, our annualized labor increase was 4.5%, which is slightly below what we had been experiencing. We continue to work hard in this area of cost control. Along with EPO and these labor pressures, insurance costs continue to be an issue for our company.

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 during 2. 2002. We believe the insurance market will continue to be difficult into the foreseeable future. Our general and administrative expenses increased to 9.1% of revenues in the fourth quarter of 2002 as compared to 8.5% for the same quarter of 2001. This increase is primarily due to the write-off of impaired assets relating to the closure of two facilities that were not meeting our financial targets due to higher than normal percentages of Medicare patients. As you should be aware, Medicare patients are not profitable for our company. Excluding these costs, our general and administrative expenses were 8.6% of revenues. EBITDA for the fourth quarter was 57.2 million or 23.5% of revenues, as compared to $48.9 million or 24% of revenues during the fourth quarter of 2001. Again, our margins this quarter as compared to last year were negatively impacted by the higher cost of EPO as well as the higher insurance premiums.

During the fourth quarter of 2002, we continued our trend of strong cash collections. Operating cash flow for the quarter was approximately 41 mail -- $41 million. This is the result of the hard work of many Renal Care associates, and I would like to echo Gary in thanking our associates for their continued dedication. Our balance sheet remains strong with 38.4 million in cash on hand at December 31, 2002. Our long-term debt as of the end of the fourth quarter was $10.2 million, including 2.8 million of capital leases. These borrowings were utilized in closing the acquisitions which we will discuss shortly. At December 31, 2002, shareholder's equity was $543.9 million, and our annualized return on equity continued to be a strong 17.5%. Day sales outstanding remained in excellent shape at 58 days, which is below our corporate target of 65 days.

Let me share with you an you update on our stock repurchase plan. During the fourth quarter of 2002, the company repurchased 884,600 shares of RCG stock for a total purchase price of just over $28.1 million. At the end of the year, we had acquired 2,983,000 shares for approximately $94 million. As of today, we have acquired 3,135,000 shares, bringing our total spending to approximately $98.2 million. During 2003, we intend to spend approximately 50 to 60 million on our stock buyback program.

However, let me once again remind you of our priorities as they relate to our company's free cash flow. First, we plan on opening enough de novo facilities to add over 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.

Towards the end of the quarter, we acquired 425 patients, giving us a great head start on our 2003 goal of 1,000 patients. These patients are located in Greenville, South Carolina, Harrisburg, Pennsylvania, and Memphis, Tennessee. Due to these early closings, we remain confident of our ability to achieve our 2003 acquisition targets. For the fourth quarter, capital expenditures were $12.1 million, with $7 million being maintenance CAPEX, and $5.1 million being investment CAPEX. During the fourth quarter of 2002, our company opened five additional de novo facilities, and as Gary mentioned, this brings the total de novos opened in 2002 to 20 facilities, exceeding our 2002 goal of 18 units. Based on our recent performance and the effectiveness of our stock repurchase program, the company is raising its EPS guidance for 2003 to between $2.06 a share and $2.10 a share, exclusive of the 7 cents per share charge we will take in the first quarter of 2003 due to the previously announced retirement package granted to Sam Brooks. I will be glad to answer any specific questions during our Q and A. And I turn it back over to Dr. Jacobson.

Thank you, Dirk. We're now happy to open up the phone lines to any questions that you might have.

Thank you, sir. The question and answer session will begin at this time. If you are use ago speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press "*1" on your pushbutton telephone. If you wish to withdraw that question, please press "*2". Your questions will be taken in the order that they are received. Please stand by for your first question, gentlemen. Our first question comes from Darren Lerich with SunTrust Robinson Humphrey.

Thanks. Good morning, everyone. I'm just wondering, Dirk, if you could comment a little bit more on your medical malpractice costs in terms of the proportion of revenue in 02 and give us an outlook for 03 in those terms, and then with regard to the renewal period for your underwritten product, just remind us when that does occur in 03, and then I have a quick follow-up.

Ok, Darren. To handle the second part of that first, we renew our medical mal around April 1 of this year. We are already in negotiations to renew that. If you look back on our medical malpractice expenses for 2002, it appears that it cost us about 10 to 15 basis points off our EBITDA margin due to the fact that the insurance costs we actually experienced were higher than we budgeted for. The outlook going forward appears to be that insurance costs continue to rise, and we will be faced once again with higher costs than we would like to see. However, in our guidance of $2.06 to $2.10, we have taken that into effect.

Ok. And then just to key in to something that Dr. Hakim had said, with regard to a focus for 03 in terms of home hemo, I'm just wondering if you can make some broader commentary on the strategy there and what exactly you're looking at in terms of rolling that out more widely. Thanks.

Well, Darren, it's nothing out of the ordinary. We just have decided to hire a person who's very interested in developing that program, both in terms of increased PD penetration as well as in terms of Hemo penetration. As you may know, our percent of patients on home therapies is about 11%, which my understanding is one of the highest of the -- in the industry, and we just want to continue working to increase that percentage as much as possible, because we think it good for the patients and we think it's also good for the company. So we don't have any -- particular targets in terms of what we want to achieve. We just continue working on it and make that therapy available to as many patients as possible. The problem has been that many patients are not aware of the advantages or the comparative advantages of these therapies, so the person that we've hired will be in charge of making that known to the patients, to the physicians and so on.

Ok. And before I jump off, maybe just to follow up a little bit more on your comments with regard to the Right Start program, and maybe remind us how many patients you have involved at this point and how many facilities you've rolled that out to, and any specific conclusions with regards to mortality or hospital days would be helpful.

We are planning to enroll approximately 750 patients or so in that program, and about probably 20 facilities or so, and so far, we are well along in terms of signing up the facilities, but not -- and since we're only enrolling patients as they come to those facilities, the enrollment now is up to, I believe, 200 or so, 150. As you know, we need to wait for each one of them to be over the 90 days before we start tabulating the data, so the numbers I'm going to tell you represent very few patients, and I want to make sure that you put it in that context.

Sure.

But it's reduced the mortality rate from a much higher than the 90-plus day mortality to about the same as the average mortality, about 22% or so. But that's on very few patients.

Ok. Great. Thanks very much.

Thank you.

Thank you. Our next question comes from Kip Hewitt with Legg Mason. Please state your question.

Yes, thank you. Just some administrative things. First of all, the cash flow in the quarter, what was the operating cash flow, and what was it for the year?

Yes, Kip. The operating cash flow for the quarter was $48.5 million, for the year, 168.8 million.

And I think you gave us the CAPEX. I'm just not able to see where I put it in my notes. Could you go over that one too?

12.1 million for the quarter, 61.6 million for the year.

Ok. And then on the -- just a little elaboration, if we could, on the Medicare -- the discussion of the Medicare pricing increases or the composite rate. Is the effort -- or will this be included in a larger Medicare bill, possibly one that includes proposals on the Medicare drug benefit, or might it be a separate bill? And is there any sort of feedback you're getting just given the enormous number of other competing pressures right now in the federal budget to help us put this in perspective? It sounds like you're getting favorable response from medpack and CMS, but conceivably going to run into a lot of other competing priorities.

You're right, Kip. We are getting good understanding from medpack and also from CMS. Frankly, when we also meet with some of the key staffers, the senate finance committee and so on, they almost all acknowledge that everybody understands that this industry is in need of an update. But the question of competing priorities always comes up. Our point that we are trying to make is that we have not -- this industry has not had any increase for many, many years, and unlike the other industries, unlike the other health care industries. And I think we're going to be hopefully presenting some testimony in front of Congress also in the next month or so to that -- related to that issue. So our sense is that they're beginning to understand that it is becoming a priority issue, particularly as we and other providers are beginning to focus on facilities that are not meeting the goals and we need to re-evaluate whether we need to continue operating those facilities. So access to care is an issue that we are beginning to see and bringing up to Congress. And they seem to understand that fairly quickly.

Is there any sense that you can get this in a separate bill as opposed to getting it -- there's obviously going to be a lot of fighting over Medicare drug benefits, and possibly getting lost in that?

We are hopeful that there be both a house bill and a senate bill that will be introduced specifically about dialysis issues. How that gets tied up is really often left up to the last minute discussion with the leadership. I cannot tell you right now what's likely to happen. We don't -- we hope it would be a separate Medicare bill to avoid a contentious issue of the drug benefits, but that's something that's obviously will be up to the leadership in Congress.

Ok. I'll go back in the line. Thank you very much.

This is Harry Jacobson. Senator Frist, in all of his public statements about his strategy and a comprehensive Medicare reform bill always includes the comments that he wants to see a reversal of the reduction in physician compensation in Medicare, he wants to see a prescription drug benefit, and he wants to see an update on the dialysis payments.

Ok. Thank you.

Thank you. Our next question in queue comes from Kelly Ceo (ph) with Morgan Keegan.

Thank you. If I could follow up on the home dialysis question earlier, with 11% of your patients currently on the program, where could you expect that percent to be, say, 12 to 18 months from now, and then what are the reimbursement characteristics of the home hemo versus your regular facility hemo?

Kelly, we never sort of -- we want to do or offer that therapy to the right patients, so we really don't have a target because there is no right target. It should be available and used by the patient if the patient and the physician agree that it's the best therapy. So all we want to do is make sure that both the patient and the physician are aware of the pros and cons and obviously the decision will be made on an individual basis. So to answer your question more directly, we don't have any guidance as to what is the number that we need to aim for. In terms of the home hemo therapy, I think as you know, it's primarily requires a stable home situation and a caregiver, a family caregiver that's willing to assume some of the responsibilities. That's a difficult combination, and of course a home that can be plumbed specifically for that. So that's a difficult situation, and the numbers of patients who qualify are not that many, but we want to continue increasing, you know, that awareness and make it available again to the right patients and their families.

Ok. That makes sense. But in the case where patients do choose home dialysis, I assume that the reimbursement rate is lower, of course, though, as are the labor rates?

No, the reimbursement rate, that was a specific intent of Congress to make the reimbursement rates the same for home as well as for in-center dialysis to encourage home therapies. So there is no difference in the payment. And although there is, you know, no staff requirements for the home therapy, there is also -- you don't have the ability to re-use, you don't have other medications that you give to the patient. So financially, it's about the same.

Ok. Thank you. And then with respect to the write-off of the impaired assets, what exactly was that amount in the quarter?

$1.1 million.

Ok. And were those facilities closed or sold or shut down? What did you do there?

We basically -- we closed those units, and the dollars we're talking about for the write-off were things such as leasehold improvements, the remaining cost of the lease, the commitment term we negotiated with the landlord. In the caves both those units, we were able to move inventory and equipment into other facilities.

Ok. Great. Thank you. Oh, one last question. With respect -- I apologize if I got this wrong here. Did you say you have 1,000-patient goal for 03?

Yes. If you remember back when we gave our target acquisition targets for 2003, it was 800 to 1,200 patients, and we just used the average, 1,000, kind of being the midpoint of where we expect 03 to end up. And so far, due to the fact that those 425 patients came up right at the end of the year and really gave us no real financial benefit that last month, that's really -- January 1 is the start of those patients. So we are well on our way toward achieving that goal.

Terrific. And would you say then the majority of the rest of your patient additions would be de novo or do you have some acquisition in the pipeline?

Well, I would love to be able to not do any more acquisitions, but Gary tells me I have to work harder than that. So I believe very strongly that we will achieve or exceed the 1,000 acquisition targets with just acquisitions, and then on top of that, we are anticipating as we told you before about 25 de novo units for 2003.

Ok. That's very helpful. Thank you very much.

Thank you. Our next question comes from Brian Daniels with William Blair. Please state your question.

Hi, guys. Quick question on your EBITDA margins. If you take out the $1.1 million impairment charge for the quarter, looks like EBITDA is going to go up to around 24.5%. Can we expect to carry this forward into the 03 numbers or are you still more comfortable with the 23 to 23.5% range?

We're more comfortable going on with the 23 to 23.5, and as we've always said, we think we'll be at the upper end of that range.

Ok. Also, can you just comment again on the same-store growth, it looks like it slowed from 5.9% last quarter to 5.6%.

Right.

What was driving that?

Well, Brian, the interesting thing about same-store growth, Dr. Hakim has talked to you about issues such as mortality and hospitalization. Quarter to quarter, that's going to vary slightly, and it's really hard for us to manage that. We look at it more as a long-term trend, and when you compare us to our goal of 5 to 6 and you compare us to the other companies announced same market growth this last two weeks, we're very pleased with where we are, and we believe it's still a strong trend towards growth.

Ok, great.

I don't think these changes are significant. These are just minor variations on the same -- around the same average.

Ok. Great. One more quick follow-up on the Medicare patients. Are you actually losing money on those or is that just a break-even?

It's just basically a break-even to us and lose a little bit depending on the allocation of corporate overhead.

Ok, great. Thank you, guys.

Thank you. Our next question comes from Andrew May with Jeffries & Company. Please state your question.

A couple things. $305 of revenue per treatment was striking to me. Could you give a little more color on whether that's pharmacy mix, pharmacy dosing, managed care pricing, charge capture? Kind of where you get that very impressive sequential quarter growth in revenue per treatment?

Yeah. Andy, it's all of the above, and one other thing you need to understand that happened this quarter versus previous quarters, we actually put our price increase in one month earlier. November 1st as opposed to December 1st. So that the normal sequential increase you see from fourth quarter to first quarter last year won't be quite as dramatic as you would have seen. We actually shifted a little of that early due to the fact that we had new computer systems and billing systems and we were able to get it in at the time frame that we wanted to get that in. But it continues to be impressive collections and all the other issues that you mentioned up above.

Good. Are you all having any trouble getting paid for Xemplar, and do you think there's any importance -- likely to be a generic version of Calcigex soon? Do you think that will be relevant at all in pricing you get for any of your vitamin D supplements?

Andy, as you know, CMS and some of the fiscal intermediaries sort of toy with the idea of paying only for the least costly alternative, and they backed off on that issue, specifically as it applies to Xemplar and Calcigex or its generic form, primarily based on some day data that I have not seen but people have talked to me about which indicate that outcomes are much better with patients who are on Xemplar. So if the generic form of -- we leave the decision to which of the medications the patients receive up to, of course, the physician's discretion. We've never made a preference for one or the other, but the trend has been for more of the patients to receive the Xemplar. So with all of that said, the availability of the generic form of Calcigex should not impact anything that we are aware of so far.

Good. Thank you. I assume the $1.1 million charge related to the closure of the centers, that was a pre-tax number?

That is correct.

Thank you very much.

Thank you. Our next question in queue comes from Bill Bonello with Wachovia Securities. Please state your question.

Great. Couple of follow-up questions. One, just wondering if you can give us an update on medical director contracts, what percent are up for renewal in 03 and 04, and if there's any exposure there, what that might be?

Thank you, Bill. As you know, when we started this company in 1996, we signed up with a number of groups that we call the founders' groups who in general have signed a seven-year medical director's agreement, and those have come due, and we have worked with all of them, and so far everything has gone very smoothly and we're close to final I see finalizing several of them, so we do not expect any surprises on that front. We have not been given any reason to think that. And, in fact, all of the ones that we have worked on have gone very, very smoothly because of the comfort that the physicians feel in terms of their relationships with RCG and our ability to provide the patients with optimal care. So it's been -- all of them have been very happy. Of course, all of them have been asking for an update, and whatever we -- it was appropriate in terms of facility -- increasing facility numbers and new medical directors, we, of course, have responded appropriately to that. So far, I think we are having smooth sailing in that front, and we expect to continue to do that.

And are you seeing an opportunity to pick up medical directors that might for whatever reason be terminating their relationships with other providers?

We have not gone out of our way to do any of that, Bill. It's clear that, you know, some of them have come to conclusion with their current providers, and we'll just -- you know, we'll just leave it up to them to call or tell us what's on their minds. But we deliberately do not go out and solicit anybody.

Sure. And then just on the Medicare side, you mentioned when you were talking about the hematocrit levels unless Congress were to do something to change the allowable hematocrit levels, is there actually discussion of that or is that just wishful thinking?

No, I think there are discussions on that, and we have had a meeting recently, as recently as last month among providers and Amgen and U.S. RDF people to present the data that hopefully will be used to make the case to Congress that higher hematocrits is indeed beneficial to the patient's outcome. So we're gradually getting there in terms of the data, which is what we will rely on to convince Congress, and CMS, that they need to revise their target range of hematocrit for ESRD patients.

Ok. And then one other thing on Medicare. Has there been any renewed discussion of extending yet again the Medicare secondary payer provision?

Well, that may come up in the mix. I think it was Kip who commented on competing priorities of Medicare. That would be one way in which our request for an annual update may be mitigated in terms of Medicare dollars. It's up there. Congress at least key staffers know about that possibility and what the financial implications of that is, and but at the moment, the bills to be introduced will not include that offsets.

Ok. Thank you very much.

Thank you. Our next question comes from Wayne Cooperman (ph) of Cobalt Capital. Please state your question.

Hi. How many shares did you guys buy in the fourth quarter, and I don't -- you guys have almost no debt. Why only 50 or 60 million in share repurchase in 03? Just seems like it's accretive, stock is down at its lows, we've got a lot of flexibility to do a lot more than that. You know, assuming the market price stays at a low level.

Wayne, this Dirk. We bought a little over 884,000 shares or $28 million in the fourth quarter. We have continued to buy slightly in the first quarter but due to obviously with our earnings release and other issues, we couldn't be in the market at all times. We remain committed to spending that 50 or 60 million out of cash. I think the reason we haven't done anything larger than that is the board of directors wants us to stay -- keep our balance sheet in such a place that there's opportunity for strategic ideas that the company wants to undertake, that we have the capacity to do that.

All right. But you just said 50 to 60 million. So that seemed like a kind of a fixed number.

Well, 50 to 60, Wayne, is what we can buy. If you take our free cash flow this year and walk it down through, after de novo growth, we're going to have about $115 million of free cash flow, and then if you assume that we buy 1,000 patients at 45 million -- 45,000 a patient, that's about 45 million. Granted we may have already bought some of those, but that's going to leave us, you know, 50 to 70 million of absolute free cash, and it's our goal to use that free cash after we've done de novos and after we have done acquisitions, then to put that back into our shareholder's hands through a stock buyback. That's where that number comes from.

I hear you. I thought that you guys said you were comfortable kind of with a debt to cash flow of up to two times, so that number would only imply you're staying with basically zero debt.

At this point in time, we're comfortable with two times debt, absolutely, for the right strategic opportunity for the use of those funds, and at this point in time, our board has decided that buying out of cash makes a lot of sense as opposed to levering the balance sheet to buy the stock back.

I would say that if you could borrow money at a low rate, which you can, and buy stock at a low multiple, it actually makes a lot of sense too, just to give you my 2 cents worth.

Yes being and we appreciate that. Trust me, that we continue -- the management of that company continues to discuss with the board of directors the right strategic move with our cash.

All right. Thanks a lot.

Sure.

Our next question comes from [inaudible].

What is your total CAPEX budget for 2003?

Our CAPEX is 65 to 75 million, and that, by the way, includes those 25 de novos, and I believe we'll be at the high end of that.

Ok. And then also you said, if I'm doing the math right, you said de novo was 20. How many did you close in the year?

20.

How many did you close?

Oh, I'm sorry. How many units did we close?

Yeah.

Two.

Two, so that would make 12, 12 in acquisitions? 12 centers, you acquired during the year?

You know, I don't know the number of centers we acquired. I generally deal in terms of patients. It was 1,200 patients prior to the 425 that we closed right at the end of the year.

Ok.

Dax, that's probably a fairly good number, but I'd have to get that if you want it exactly.

No, that's ok. Thanks.

Thank you. Our next question comes from Gary Lieberman with Morgan Stanley. Please state your question.

Thanks. Dr. Hakim, I was hoping you could update us with regards to your thoughts on the use of single use dieizers (ph). Are we more likely to see that, less likely to see that?

As you know, we have selected certain markets where -- with the total number of patients about 800 or so. To introduce single use dialyzers in those markets. It hasn't been quite a year yet since they switched over. We're waiting for at least a year before we see any patient impact and financial analysis. I can tell you just looking at the numbers, nothing is jumping out at me and saying, wow, so at the moment, we think if there are any differences, it looks -- within a year, at least, fairly small.

How about from a financial perspective, what type of --

We know from a financial perspective that it won't -- it will reduce the margins. We know that going in. The way we try to engineer that is by leveraging our contracts so that for all of RCG, it's still neutral, but for those markets which have the single use dialyzers, it will be more expensive. So although financially for RCG as a whole, we will remain neutral, we know that that represents an increase in the markets where the single use is, an increase in the costs of supplies in the markets where single use is used and a diminution across the rest of RCG.

have you seen any increased demand in patients in any of the facilities you're not offering it in?

No, not that I've heard. And I would probably hear about it fairly quickly. I have not heard that, no.

Great. Thanks a lot.

Sure.

Thank you. Our next question comes from Darren Lerich with SunTrust Robinson Humphrey.

Thanks. Just a follow-up, if I could here. Dr. Jacobson, while we have you on the line, could you just provide us with an update on the management succession plans and perhaps tell us how many candidates you have in queue and kind of what the timing looks like at this point? Thank you.

Thank you. As you know, there is a governance nominating committee that I chair along with three other independent directors, and Mr. Brooks announced his retirement from president and CEO position, and we said we would certainly find someone before the end of the calendar year. The goal of this -- of our committee is actually to find someone certainly before the end of the first half of this calendar year. We've interviewed and have selected and will -- intend to engage a top-quality search firm to help us. We are putting together a short candidate list that is coming from our board members and management, and we're going to combine that with any recommendations that we get from a search firm. The process is moving along nicely. We're comfortable with where we are, and as we said in our press release, we really can't comment any further in detail until we select the final candidate.

Ok. And just so I'm clear, if I heard you correctly, your goal is to have this process completed with a new CEO before the end of the first half?

Correct. We will have the person named and on board before the end of the first half of the year.

Great. Sounds good. Thank you.

As a reminder, should you have a question, please press "*1" on your pushbutton telephone at this time. Gentlemen, please stand by for any further questions. Our next question comes from Kip Hewitt with Legg Mason. Please state your question.

Yes. Just one minor thing. You have, I guess, you might call them joint ventures or you've taken over programs of 120 hospitals -- I'm getting a lot of static. I don't know if you can hear me.

We can.

Yes, we can, Kip.

And the question I have is, are you seeing any change in the pattern or what the hospitals are looking for, willing to do, their level of interest, et cetera, in your taking over the dialysis programs in many of the hospitals around the country? Could this number of hospital based programs significantly expand for you?

Kip, are you referring to our acute contracting initiatives? Or joint ventures?

Well, I'm not sure if I've made that sophisticated a distinction. I know you go in and you handle the acute, but I guess where many hospitals have an outpatient dialysis unit, I guess you've taken over many of those programs too. Am I correct?

That's correct. We have about 120 acute contracts that we operate within hospitals across the country, and what we do is annually try to sit down with those hospitals, go through the value-added services that we provide to the hospitals. We look at staffing issues, we look at cost issues, we evaluate those contracts, we look at the quality outcome issues within those relationships, and at various times, those contracts fluctuate and change. I would have to say, though, over the last six, seven years, we've had a pretty consistent pattern of working with the same facilities in terms of acute contracts. Occasionally that changes, but by and large, we work with the same organization.

But with so many hospitals under a lot of financial stress right now in the not for profit sector, is there any sort of ramp-up likely in these number -- in these relationships?

Kip, let me clarify the difference between our joint ventures and our acute program. In an acute program, we sign a contract with the hospital to provide their in-hospital acute programs. With our equipment and sometime with our nurses. It depends on how Gary negotiates it. That's as opposed to the joint ventures where we may go in and actually buy an outpatient program from a hospital and they remain a joint venture partner with us. The 120 acute contracts that we've had have remained fairly consistent over the last few years, and we believe that will be a consistent to slightly growing area, but not a big focus. Our biggest focus is on the JV side of the equation.

And there will be more opportunities there. I think your assumption is correct. And it's still one part of the dialysis market that is relatively non-consolidated.

We seem to have good success in working with hospitals. They like the culture that we bring, they like our focus on providing the quality outcomes, et cetera, so I think that's a good strategy for us to continue to pursue. It's worked well for us, and our hospital partners seem to be relatively satisfied with it.

Ok. Great. Thank you.

Ladies and gentlemen, should you have any further questions, please press "*1" on your pushbutton phones at this time.

Well, ladies and gentlemen, this is Harry Jacobson again. I want to thank you all for participating on this conference call, and we look forward to 2003 and look forward to future conferences with you. And of course if you have any questions of man management, you guys know Dirk's phone number. Thank you very much.

Thank you, sir. Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051, or 973-709-2089 with an ID number of 281896. This concludes our conference call for today. Thank you all for participating, and have a nice day. All participants may now disconnect