Fresenius Medical Care AG (FMS) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Renal Care Group fourth quarter and year-end 2003 conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Wednesday, February 25, 2004.

I would like now to turn the conference over to Gary Brukardt, President and Chief Executive Officer.

Thanks, Billy. Good morning, ladies and gentlemen. Welcome to Renal Care Group's earnings conference call. We're pleased to report excellent results for the fourth quarter and year ending December 31, 2003 both in terms of our medical outcomes and our financial performance. Participating with me on the call today is our Chief Medical Officer, Dr. Ray Hakim, and our Chief Financial Officer, David Dill. Let's begin with Doug Chappell, our General Counsel, who has the usual cautionary statement to make regarding forward-looking information.

Thank you, Gary. Some of the information we provide and discuss on this call is forward-looking information and is given in reliance on the Safe Harbor provided by the Private Securities Litigation Reform Act. The forward-looking statements involve known and unknown risks and uncertainties and will include comments by Mr. Brukardt, Dr. Hakim and Mr. Dill about the Company's prospect and corporate objectives. Our actual results could differ materially from these forward-looking statements due to certain factors including changes in the Medicare and Medicaid programs, payment reductions by private insurers, hospitals, and managed care organizations, changes in the health care delivery, financing, or reimbursement systems, risks related to the drug Epigen (ph) , compliance with applicable laws, the integration of acquired companies and dependence on executive officers.

These and other risks and uncertainties are discussed in our reports filed with the SEC including our annual report on Form 10-K for the year ended December 31, 2002 and our quarterly reports on Form 10-Q for the first three quarters of 2003.

Thanks, Doug. I would like to begin with a brief overview of our results and several strategic initiatives that we would like to discuss. Then Dr. Hakim will discuss our medical outcomes for the quarter and bring you up-to-date on some legislative issues. Then David Dill will present a detailed financial report on the Company. Afterwards you will have the opportunity to ask questions of each one of us.

Some of the financial highlights for the quarter ended December 31, 2003 which you can see in more detail in our press release are revenues increased to $262.3 million, a 7.9 percent increase over the same quarter last year. Net income increased to 27.9 million, a 12.3 percent increase over the same quarter last year. And earnings per share increased to 56 cents per share, a 12 percent increase over the same quarter last year.

The Renal Care Group in 2003 was a year of repositioning our management and government structures. During 2003 and so far in 2004 we have made a number of changes and realignments within our organizational structure, all of which I believe have further positioned us for future growth as a Company.

Subsequent to year-end we added two new board members, Mr. Tom Smith and Mr. Peter Grua. We are now in compliance with new New York Stock Exchange corporate governance standards and with the separation of the offices of Chairman and Chief Executive Officer we are herein to developing best practices in the corporate governance arena. I think this will make our Board even more effective as we move forward.

Earlier this month we were pleased to close the acquisition of Midwest Kidney Centers dialysis program, which consists of 13 centers serving approximately 825 patients and added eight new acute contracts. On February 2, 2004 we signed an agreement to acquire National Nephrology Associates, a transaction we expect to close on or before March 31, 2004. We are well into that transition process, working very closely with Mike Cannizzaro, NNA's Chairman and CEO, and his team at NNA. We are confident in our ability (technical difficulty) NNA's 87 facilities and approximately 5600 patients.

During 2003 we focused on several new initiatives to address the broader continuum of care for patients with kidney disease including pre- ESRD patients. I know that Dr. Hakim has previously introduced and discussed these initiatives with you, but I thought I would highlights them further in this presentation.

We have had a pilot program in effect at about 20 of our facilities, particularly focused on patients with diabetes. Twelve of these programs have been approved by the American Diabetes Association and the results of the programs to date are very encouraging. We are in the process of determining how to successfully implement and operate similar programs across the Company.

Doctor Hakim has also provided information on our Right Start Program, which is focused on patients during their first 90 days of dialysis care, when mortality and hospitalization rates are especially high, as we have shared with you in the past. In concert with the diabetes program and Right Start initiatives, we are working closely with our affiliated physicians in selected regions; we are exploring broader approaches to address the needs of patients who are experiencing symptoms of chronic kidney disease or CKD. Although it is premature to determine the overall effect of the CKD initiative on patients who ultimately initiate dialysis, anecdotal evidence indicates that a focused free SRD (ph) programs lead to improved outcomes for those patients when they start dialysis. We plan to share more about these programs with you as our studies in data gathering processes continue throughout the year.

Along with our review of these clinical initiatives we have worked diligently to manage labor costs by making improvements in productivity while maintaining our solid clinical results that Ray will share with you. I want to take this opportunity to once again thank our management team for their efforts in this area.

In October, 2003, our Board of Directors approved a $250 million increase in our share repurchase program that we expect to complete by early 2004.

I will now turn the call over to Dr. Hakim and after that will be happy to answer any specific questions during the Q&A portion.

Thank you, Gary. Good morning, ladies and gentlemen. I'm very pleased to present to you highlights of the patient outcomes we follow, which includes data on more than 22,000 patients we presently serve. I will also the commenting on some of the regulatory and legislative initiatives we have participated in as well as an update on some of the vendor agreements we have concluded.

In terms of the dialysis outcomes we follow, we tracked the percent of patients received the optimal dose of dialysis. This can be expressed either as urea reduction rates or URR or Kt/V. Both are interchangeable but because there is a trend to reporting K2RV, we will adopt this measure from now on.

Our target for Kt/V (ph) set by the medical advisory board is 1.4, which is higher than the minimum target of 1.2 set by a (indiscernible) guidelines. We currently have 84.5 percent of our patients achieving this target, which is 140 basis points higher than a year ago. In terms of the minimum dose of Kt/V of 1.2, which is the target reported by CMS, 94.3 percent of patients have received this dose, compared to 89 percent nationally.

In terms of anemia management, the percent of patients with hematocrit of 33 or greater is 77.8 percent. We have remained at this level for some time to remain within the hematocrit target guidelines set by CMS. As I mentioned last time, CMS has opened a comment period on the appropriate range of hematocrit's for ESRD patients and we have responded to that and we hope that they will continue to look favorably at the improved outcomes of patients with higher hematocrits.

In terms of hospitalization, our average hospital days this quarter has increased slightly from 11.8 days per patient per year to 12 days per patient per year. This is still 2.3 days lower than the national average of 14.3 days published by the U.S.R.D.S. This is a modest seasonal increase that we observe in the winter months annually.

We are also pleased that the one year rolling average for mortality has remained at 21.5 percent and again that this is 2 percent lower than the national average.

As many of you have heard, CMS has staffed all the ESRD networks with an initiative to improve the percent of patients with fistulas because of the much better patient outcomes of this type of blood access. The targets set by Bill Key and adopted by CMS is to have 40 percent of patients with fistula in this three-year program and I am pleased to report that because of our continued emphasis on this issue in the past we are at greater than 35 percent of patients with functioning fistulas. Just as a historical note when we started monitoring this data in 1998 we were at less than 20 percent of patients with fistulas. The U.S. national average is about 30 percent of patients, so we are closest to achieving the goal of 40 percent in three years.

I am also pleased to give you a preliminary report on clinical initiatives that we have been engaged in that Gary has mentioned. The first is the Right Start program that focuses on the education and process of care of patients as they initiate their life on dialysis and specifically the first 90 days. We continue to see improvements in the hospitalization and mortality of the group of patients participating in this pilot program, and we are exploring ways in which we can operationalize this program when the pilot project ends at the end of 2004.

As Gary mentioned another pilot program that we have been working on for some time is improvement of care processes in diabetic patients with ESRD. The percent of patient starting dialysis who are diabetic is approximately 45 to 50 percent depending on the region, and these patients tend to have multiple other comobilities (ph) . We have initiated this education, monitoring, and care management programs in 20 facilities across our TG. Twelve of those sites are recognized by the American Diabetic Association, which is required for CMS billing for diabetic education.

The clinical outcomes such as the rate of amputations and overall mortality has clearly shown the benefit in this program, and this is another initiative that we are evaluating in terms of expanding it beyond the pilot phase. And we are also exploring today as a matter-of-fact, we had a conference on that subject with a number of physician practices related with RCG to review the opportunities to work collaboratively on a pre-ESRD or chronic kidney disease care model. We believe there are opportunities to improve the process of care and the educational patients in that setting and to the extent that a patient coming into dialysis is better educated about mortality choices, better control of blood pressure, anemia and nutrition, the better his or her outcome on dialysis will be. This initiative is not likely nor does it plan to be a significant revenue stream for RCG, but we believe it is part of our commitment to improve the outcome of patients who eventually end up on dialysis.

We have also finalized several major vendor agreements. We have already mentioned a number of these in our last call. Our contract with Amgen beginning in January 2004 is now for 25 months. And we feel comfortable that we can mitigate the majority of the increase in the purchase price with quality outcomes. Similarly we had announced our agreements with Baxter as well as with Abbots (ph) for Vitamin D products. We are also well along our discussions with Fresenius to renew our existing contract and we feel we will have a good agreement with them also. These agreements will allow us to maintain the cost of supplies practically flat in constant dollars.

Next I would like to comment on the several regulatory initiatives by CMS. First the whole industry under the umbrella of kidney care partners, which groups together more than 20 organizations ranging from the dialysis providers, suppliers, pharma companies, nurses and physician organizations, as well as patient representatives, has responded to the proposed changes to the AWP payment structure as mandated in the Medicare Bill which was passed last year. Representatives from this group have already met with the OIG Office who are faced with the determination of the acquisition cost of drugs and the dialogue of the OIG has been cordial and professional and the industry has been responsive to their data requests.

Several entities including the group of providers have also responded to CMS on the issue of appropriate hematocrit range for ESRD patients as I mentioned earlier. We and others are also meeting with Metback (ph) to review the accuracy and comprehensiveness of the Medicare cost ratios of the ESRD facilities so that their analysis of the payment to cost ratios for Medicare beneficiaries which they need to supply to Congress corresponds to our analysis that we have been sharing with Congress. As far as legislative efforts, we continue to work collaboratively and very effectively with all members of the kidney care partners to develop a comprehensive ESRD modernization program that will span initiating Medicare sponsored programs for ESRD or CKD care, outcome-based reimbursement that is not budget neutral, but the heart of this effort remains the requests to have an annual update formula that is fair to this group of healthcare providers and eliminates the discrimination we have been working under.

This concludes my remarks and I would be happy to answer any questions later on. David?

Thank you, Dr. Hakim. As Gary mentioned earlier, earnings per share for the fourth quarter of 2003 were 56 cents, compared with 50 cents for the fourth quarter of 2002.

Non-GAAP earnings per share for the year 2003 were $2.12 per share excluding the previously announced retirement package for Mr. Brooks, compared to $1.82 for 2002. This represents a 16.5 percent increase in EPS for the year. The increases in both the fourth quarter and year-to-date EPS were driven by continued volume growth, pricing growth, acquisitions, expanding EBITDA margins, and a small impact under the previously announced $250 million stock repurchase program.

Fourth quarter revenues increased 7.9 percent to $262.3 million, as compared to $243 million for the fourth quarter of 2002. Our same market treatment growth of 3.4 percent for the fourth quarter is below our 2003 corporate goal of 5 to 6 percent. This reduction is a result of two factors. De novos that were not opened as planned in the third and fourth quarters but are expected to be open during the first half of 2004; and a slight decrease in the growth rate both for the ESRD industry, as evidenced by the most recent USRDS report, and local competition that we see in some of our markets.

Patient service revenue for treatment increased 1.6 percent to $310 per treatment, as compared to $305 per treatment for the fourth quarter of 2002. Sequentially our revenue per treatment increased two dollars from a $308 per treatment number we reported for the third quarter of 2003. This sequential increase in revenue per treatment is a result of our charge master increased that we implemented during the fourth quarter of 2003.

Patient care costs increased to 65.1 percent of revenues in the fourth quarter, as compared to 64.8 percent in the same quarter of 2002. On a per treatment basis, patient care costs increased 2.5 percent to $204 per treatment, as compared to $199 per treatment during the same quarter last year. This cost increase is due mainly to higher prices for EPO (ph) that Amgen implanted on December 1, 2003 in accordance with our contract and an increase in labor and related benefit costs during the period.

As we have shared with you previously, our labor cost increases have moderated slightly. In the fourth quarter of 2003, our annualized labor cost increase was approximately two percent, with most of this increase coming from our benefit plans for our associates. We continue to work very hard in this area of cost management and are pleased with the momentum we have going into 2004.

I am pleased to report that we were able to keep G&A costs to a historically low level. G&A decreased to 8.2 percent of revenues in the fourth quarter of 2003, as compared to 9.1 percent of revenues during the same quarter of 2002. The decline from the fourth quarter is primarily attributable to the changes and realignments we made within our organizational structure during 2003.

EBITDA for the fourth quarter was 63.1 million or 24.1 percent of revenues as compared to 57.2 million or 23.5 percent of revenues during the fourth quarter of 2002. Our margins for the fourth quarter as compared to last year were positively impacted by our continuing cost controls and focus within both patient care costs, but primarily G&A costs.

During the fourth quarter of 2003 we continued our trend of good cash collections. Operating cash flow for the quarter was approximately $38.3 million.

Our balance sheet at December 31 of 2003 reflected $50.3 million in cash on hand and our long-term debt as of the end of the fourth quarter and year was $2.7 million, primarily comprised of capital leases.

Shareholders equity was 570.8 million and Days Sales Outstanding remain in excellent shape at 61 days, below our corporate target of 65 days.

Let me give you an update on the status of our plan to repurchase $250 million of stock that we announced in late October of 2003. During the fourth quarter of 2003 the Company repurchased approximately 2.6 million shares of stock, spending approximately $105.2 million. As of today, we have acquired 4.4 million shares, bringing our total spending to approximately $181.9 million or approximately 73 percent of our previously announced $250 million program.

We will continue to actively repurchase our stock over the next 45 days and we plan to complete the repurchases by the end of the first quarter or the first couple of weeks of April.

Let me remind you once again of our priorities as they relate to the Company's use of free cash flow. First, we plan to open between 20 and 25 de novo facilities during 2004, including facilities planned by NNA. Second, we will continue to make selective acquisitions in markets that we operate in. And finally we will continue to repurchase shares of our common stock.

For 2003 we acquired programs representing approximately 1400 new patients. This number includes the acquisition of Midwest Kidney Centers, which as Gary mentioned added 13 facilities and approximately 825 patients and was effective on January 1, 2004.

For the fourth quarter, capital expenditures were $19.7 million with $13.6 million of maintenance CAPEX and $6.1 million of investment CAPEX, which includes our de novo program. During the fourth quarter of 2003, we opened one de novo facility, making our 2003 total of 11 facilities. However I am happy to report that we are on schedule to open six de novo facilities during the first quarter of 2004, counting toward our goal of between 20 and 25 new facilities during the year.

On February 10 of 2004, we entered into a new credit agreement with a group of banks. This agreement has $150 million revolving credit facility and a committed $325 million term loan facility. Our ability to borrow under the committed term loan facility portion expires in May of 2004 and all of these facilities mature in 2009. The credit agreement provides that $175 million of the committed term loan facility may only be used to finance our previously announced acquisition of National Nephrology Associates.

If you have any questions, I will be glad to address them.

Thanks, David. Operator, we're ready now to take questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Darren Lehrich of Piper Jaffray.

Good morning, everyone. I wanted to just get a little bit of the update from you as it relates to you are seeing market treatment growth and the slightly lower growth that we saw in the quarter. I guess the couple things here. First, is medical director contract renewal, does that have anything to do at all with some of the softness you have seen in the quarter? And if you could please quantify for us how many were up for renewal in 2003 and then will renew in 2004 and 2005? And then I've got a follow-up, thanks.

Darren, as we shared in our prepared comments, we've seen a slight decline in the growth rate for the industry. We see that in many of our markets. It's not just one or two specific markets that we operate in. Also we do see some local competition in some markets. As we have said in the past is we will continue to say into the future we feel very strong about the relationships that we have with our doctors. We feel very strong that we will be able to renegotiate many of our medical director agreements, but there may it be some medical director agreements in some of our markets that either the physicians may not choose to renew or we may not choose to renew not only for financial reasons in the local marketplace, but most importantly from an operating standpoint and from a medical leadership standpoint.

There will be cases in the future as we look at the portfolio of medical director agreements that come up for renewal that we may choose not to elect but that has been our business for a couple years and into the future is no different than what we've seen for the last couple of years, as many of our agreements have already come up for renewal and we have been successful in renegotiating our founding group of medical directors.

Maybe if I could just ask on the pricing side, we all know about some of the pricing pressure you have experienced in a couple contracts on Jan 1. Maybe just characterize recent contract discussions and whether you've got any change in your visibility to pricing in 2004?

We announced through our regulatory filings in the last four conference calls that we have four payer issues come up over the course of a last six or nine months, two Medicaid states that we operate in and two big commercial contracts. We implemented our charge master increase during the fourth quarter of 2003 that approximated close to 8 percent increase. Not all payers obviously pay the 8 percent increase. Very few do. But there is no contracts that have come to our attention that will result in any lowering of a view of revenue per treatment or raising the view of revenue per treatment as we go into 2004.

As we shared a few in the past, we had those two contracts and we now have those smoothed out or rationalized for the next couple of years going forward as well, so we feel good about those two particular contracts that we had in the past on the commercial side.

Thanks, I'll just get back in the queue.

Gary Lieberman of Morgan Stanley.

Thanks. Maybe just to follow-up on some of the pricing, what percent of the Medicaid reductions did you experience in the fourth quarter? Or does that not show up until the first quarter?

There is a very small impact in the fourth quarter. If you look at our minority interest expense as a percent of revenue, that has declined sequentially from about 2.6 percent of revenue down to 2.4 percent of revenue. We have a partnership in the State of Wisconsin with a local hospital where we own a percent and obviously the hospital owns the other portion of the joint venture. That reduction began impacting our numbers during the fourth quarter -- not to a large extent, but the full impact of both Washington and Wisconsin will be reflected in our numbers in the first quarter of 2004, but there is a very small impact only in the State of Wisconsin during the fourth quarter.

So if we were to think about that in terms of net revenue per treatment impact, where do you think sequentially net revenue per treatment goes in the first quarter?

We feel like depending on -- we now have this acquisition of NNA that will perhaps come into our numbers for little bit during the first quarter depending on closing. We also have Peoria that is coming up as well. If you were to carve those out and look at just the underlying same book of business, we would expect revenue per treatment to be flat to down slightly as a result of the two contracts and the Medicaid states from the fourth quarter into the first quarter.

Okay and does that also take into account the 850 patient acquisition?

Yes, as we close, we have just operated the Peoria units now for a few days. We are in the process of getting our hands around the revenue per treatment picture there. But as you carve that out and look at what is revenue per treatment on the book of business that you had during the first quarter or fourth quarter, expect the revenue per treatment to be down a couple of dollars per treatment as a result of that. The impact of the charge master increase will not completely offset the impact of lowering reimbursement in the four programs we have talked about.

Okay and then real quickly if you could elaborate a little more on the competition comments that you are seeing in markets, is that any different than what you have seen and talked about historically? Or if you could just bring us up-to-date there, thanks.

It's not, Gary. But what we're seeing in this business -- there's new players coming into the space. They are not big players. To put this into perspective a little bit for you, the 3.4 percent growth that we recorded, the difference between 3.4 percent growth and 4 percent growth is only about 120 patients. That is attributable to our de novo program. It is also attributable to just small new doctors and new companies being formed in different markets that are building patient bases as we go. And we see that competition in the marketplace. It is nothing new. It's a reality of what we will face going into the future for the whole industry.

Thanks a lot.

Ryan Daniels of William Blair.

Thank you and good morning gentlemen. Dr. Hakim could you talk a little bit about the single use dialyzers and the work that you have been doing through the pilot programs and what the issues of that are?

Yes, as you know we have piloted in a number of facilities that include approximately 700 patients in various parts of the country. A single-use program that was designed to make sure that we can have an accurate assessment of both patient outcomes as well as any financial impacts of this program. I think while the analysis is still in its early phases and we have not done a case mix adjustment between various factors, we at the moment do not see a noticeable change in patient outcomes in the those facilities. And the financial analysis is of course a little bit more complicated because you need to keep track of who was in the program before and after, and that is still ongoing. But we still think it is not going to be budget neutral to convert to single-use at the moment.

Now we do continue to negotiate with all of our vendors and we try to get best prices on the single-use as well as multiple-use products, so it's going to be a moving target and our analysis will reflect looking back at it, but at the moment we do not see the financial benefits of moving to single-use across the spectrum of the facilities, and we don't see anything in terms of patient outcomes that will drive us into the direction yet.

Follow-up to that in regard to NNA, I have two questions. One, I know they use single-use dialyzers. Do they use that for all of the 5600 patients at all of the facilities, or is it just some of their facilities using some of these?

No. My understanding is that we're in the process of due diligence but my understanding is that they use it in all facilities as single-use, not reuse facilities.

And then I assume longer-term especially in looking at that business and looking at your pilot with your 700 patients, if it looks financially negative and no greater patient outcomes, is that something you would probably consider pulling those patients off single use, and going to reuse and obviously that would probably be even more accretive and potentially add to EBITDA? Is that fair to say?

I think that is fair to say that that is always a topic that we evaluate all the facilities what as we're doing with due diligence and we are far from coming to any conclusion on that, but we obviously instituting reuse is not simply making that decision but you need to have the space for it. You need to have the equipment for it. You need to have the compliance issues and regulatory issues. So I think what we're doing at the moment is just evaluating that possibility, but not coming to any conclusion. And it is not going to be done for I think for several quarters yet, if any.

Last question I have, if you could give a little more detail on the Right Start Program. That is fairly intriguing to me because I know by increasing -- reducing the mortality up front it could keep patients in the system longer, not only have benefits for the patients but obviously a lot of financial implications and upside for the company. Can you talk about how many programs are currently doing that? I know you said it ends in '04 and maybe the potential to roll that out nationally? And also very quickly hit some of the highlights, how much reduction you have seen in mortality and hospitalizations through the programs with Right Start?

Right, I think we have at the moment approximately 700 patients that have enrolled. As you know we track them for 90 days intensively and then we track them less intensively after 90 days. And so we have approximately 700 patients that are enrolled in the program and as we develop new patients or as we meet new patients in those facilities, we will increase that number to hopefully 1000 patients that will be run through the program. At the moment one of the issues is that you need to compare the outcomes with control groups of patients that are not part of the program, so we are at the moment looking at that to see the total impact of the program.

But just looking at the historical experience in those facilities where we have that program compared to now and specifically looking at the first ninety-day patients, we are looking at somewhere between a 25 to 50 percent decrease in hospitalization and mortality. Now that is comparing historical data to current data, but the better way of evaluating it is to compare it to case mix adjusted patients in other facilities, so that is the process that we're going at right now.

Ryan, this is David. As a follow-up to that in our prepared comments you saw some of the changes we have made to our operating structure from a G&A standpoint. And under Gary's leadership, looking at how do we continue to grow this company, we have made efficiencies on the G&A side and we are allocating a piece of those savings and resources to align them more directly with our growth objectives (technical difficulty) of the Company. Right Start is one of those programs, so the data looks good at this point. Dr. Ray Hakim will continue to monitor it. But this is a great place to put our resources and moving those dollars from the G&A side to the patient care side to directly allows those growth objectives, something we all feel very strong about.

We have this commitment to try to focus on this full continuum of care and I like what we're doing. I think we've got a lot of work yet to do but we're seeing some encouraging things with it and Ray and the medical adviser board and the affiliated physicians and the company and our staff are working pretty carefully to see if these are opportunities for us to improve our outcomes in our patient populations.

Ryan again just to fill you in -- we're looking at a couple of models of doing this, one in which we have a clinical nurse actively doing the interventions with each patient and another model where somebody is trying to get a staff within the facility to do it, so that is why the results are a little bit mixed and we want to analyze that data before we make a decision as to a how we operationalize this program.

The next step in that process, once you get the results and you have a good sense of how these programs work you have to go through the process of how you operationalize them across a total patient population, so those are the things we're looking at.

At the moment this program is funded to a large extent by Amgen and they are committed to funding it for this year also.

I appreciate that update. It sounds like you're excited about it and I look forward to future updates. Thanks.

David Dempsey of Avondale Partners.

A question for Dr. Hakim and then probably a follow-up for David. When you are looking at integrating new acquisitions like Midwest and looking forward to NNA, the quality issues and how you implement your quality standards and bring other entities up to the levels that you have achieved, which are exemplary, has got to be a challenge. I guess I would like to just hear how you go about that and what other kind of issues that you deal with in terms of integrating those?

And then I guess the follow-up for David would be what kind of expectations should we have in terms of patient care costs and even G&A as we go through such a transition?

David, these are very good questions and I appreciate your asking them. I think, to be fair, what we do is that during the due diligence process before we finalize the transaction we make sure what their outcomes are and we have a fairly extensive list of questions about their outcomes and then we get also a sense of about the receptivity to a program of continuous quality improvement. And I would say that these are two things among several other things of course but two things that we focus on before we come to a decision as in terms of whether we proceed with our affiliations or not.

And both the Peoria and NNA groups have really been very receptive and have their own programs already in terms of quality improvement. Once that the initiation is done, then we mobilize a number of people to go and meet with their clinical staff and develop teams for CQI activity. It's not that it takes a number of meetings and discussions and we let them know then about what the medical advisory board has set as targets for us. Sometimes these are different than what they are -- what they have been used to, but we encourage them to develop programs to meet those targets.

And within three months from the date of acquisition, we start then collecting data on all the new affiliations and then sharing it with them in a format that allows them to compare themselves to other facilities in the same market, in the same region, and across RCG. And that is what drives everybody to try to do better is when they look around and see that people around them are able to get better outcomes. So the datas that we report as we have always maintained, data includes all new acquisitions from -- after 90 days from the close or from the closing of the agreement.

On what you should expect from the patient care cost side, the big differentiating factors in this industry when it comes to looking at patient care costs primarily relates to the utilization of drugs. Once we implement our pricing contracts across the utilization of drugs that they are prescribing and dosing right now, it is going to be very, very consistent with Renal Care Group's. The only major difference on the patient care costs side once we get this implemented will be the fact and Ryan Daniels asked a question earlier on single use versus reuse, the single use that they have in their facilities adds two or three dollars per treatment that is over and above what we have and all of that shows up and patient care costs. So absent that, the cost structure on patient care costs is very, very consistent.

Moving down to G&A, in the $45.5 million guidance that we gave you, that did not include any synergies that we expect to achieve. Their G&A costs that they have right now as a company is very, very consistent to Renal Care Group's, however, as we go through this transition process as we not only identify synergies but more importantly get those synergies implemented into the business, you should expect our G&A costs as a company to decline to a level below what we reported in the fourth quarter. I will caution you a little bit. Those aren't Day One. That's why they weren't built into the guidance that we gave you earlier this month, but we do expect to see some as we go throughout 2004, primarily in the late half of 2004 as those get implemented.

Thank you very much. It's very helpful.

John Ransom, Raymond James.

Good morning. Just a couple of financial questions I guess for David. I know you have spoken around this, but to nail this down a little more precisely, in our model we're looking at something slightly north of 200 basis points of EBITDA margin decline in '04. Could you parse that a little bit between NNA, the other acquisitions, Medicaid cuts, and other things that might be going on facilities (multiple speakers)?

Are we getting some feedback? Is that okay, John, can you hear us. We are expecting our margins to decline to approximately 23.5 percent, in that range as we go into to 2004. That is a result of the changes in reimbursement that you just talked about. The rest of the decline is solely attributable to the NNA transaction, so if we were to take the margins from NNA and you've got -- I'm sure many of you have the prospectus on their note issuance, their margins are 15, 16 percent. We will be able to increase those margins fairly quickly as a result of implementing our pricing structure in certain contracts coupled with moving their patients into our laboratory in Jackson, Mississippi. Remember they don't have their own lab and we will move those patients over about a six or eight month period into our lab. That will improve their margins from about 16 percent to about 18 percent.

The rest of the margin expansion to get them up to where we are will come in how we look at G&A costs and synergies that we expect to derive and also their single-use strategy that they have. Their footprint on top of that will not allow them to achieve margins of where Renal Care Group is. If you were to take out a couple of states that we operate in where they don't operate in, most notably Indiana, Illinois, the State of Washington even after the Medicare reduction, those states have higher EBITDA margins than the company average. So once you take that out, the single use, the G&A costs, the lab and the pricing structure on contracts, margins will be fairly consistent to ours. But we will see a decline in margin just solely as a result of bringing this acquisition on.

The Peoria transaction, their margins are fairly consistent to ours and we don't expect any decline in the company margins solely as a result of the Midwest Kidney Center acquisition.

Just a couple of follow ons. How much is left, if you will, to acquire once you take out NNA and what has gone in the industry from an M&A standpoint? Are we down to less than 15 percent of the market now that is not hospital-based and not owned by the big four?

They're still is opportunities out there. We have a new Board member, Mr. Tom Smith has a strong hospital background. We think our niche is our relationships that we have developed over time with our hospital partners. We expect that there is still opportunity there in the hospital sector. It just takes -- the gestation period of getting the hospital program to closing takes a long time.

Those transactions just take a little bit longer in terms of going through their processes within the organization, but we think that is an opportunity for us going forward.

Obviously the small niche players that remain in the business -- we talked a little bit about competition that you see. There are small venture capital equity players in the space that have in between 500 and 2,000 patients. Those opportunities remain as well, so we think continuing to focus on our de novo strategy, coupled with the hospital program and the other unconsolidated companies that are out there, our 1000 to 1500 patient, we feel very comfortable for the next three to five years that we can acquire those type of programs within our purchase price parameters.

Okay, thank you very much.

Jeff Gates of Gates Capital.

Can you talk about why the distributions in cash to minority shareholders was so high in 2003 and what you expect minority interests to be in '04?

There was several partnerships during the year. It is our goal to distribute everything that our partners earned during the year that is their money in the current year. There was a small delay in some previous years as we ramped up some of our big partnerships, but it is our goal if you look at the cash flow statement for 2003, distributions to minority shareholders were approximately 25 million and the earnings from those minority shareholders were approximately 25 million as well. So from a modeling standpoint into the future I would expect that to be very, very consistent from a cash flow standpoint. Whatever that earnings is in your model, that gets distributed. Does that answer your question?

Do you expect it to be in '04?

Approximately -- it will probably be around 25 to $26 million again next year, keeping in mind that we have a couple partnerships that are affected by the managed care contracts in the state Medicaid programs, so as their income goes down, as our cash flow goes down, their distributions go down as well. I would expect it to moderate just a little bit.

And what were your patient care costs for treatment during the quarter and for the year?

During the most recent quarter our patient care costs were $204 per treatment, just under $204 per treatment. For the year it was approximately $201 per treatment. That increase is primarily related to insurance costs that we have been talking about and also labor costs as they continue to grow.

Great, thank you.

Balaji Gandhi of Deutsche Bank.

I just have a few questions. First if I could get the payer mix for the quarter. And second, did I hear you say, David, that you were expecting the margin decline to 23.5 percent? That is all inclusive, all the different pieces would lead you to a decline of about 50 basis points?

That is before the NNA transaction. That is just in our book of businesses as we get affected by those big Medicaid reductions that we talked about and the two payer contracts. And overall we expect the margins to be in the neighborhood of about 22, 22.5 percent once you include putting NNA into our numbers.

Payer mix, Balaji, roughly 49 percent of our revenue in the quarter came from Medicare, six from Medicaid, about 40 from profit, and about 5 percent from hospital. Keep in mind that the Medicaid number, that six percent, will decline a little in the first quarter based on the two states.

Thank you.

Andrew May of Jefferies.

A couple of things. Are there any other states where you have Medicaid, significant Medicaid exposure where you're still getting paid meaningfully more than Medicare rates?

As we have said in the past, we have two other states where we are paid at a higher rate than Medicare. That is Alaska and New Mexico. And today, Andy, we have not heard any information about whether those are going to change or not. And, David, the effect of that is --?

If they were to reduce that down to Medicare rates, the full year effect would be approximately $1 million.

Thank you. Will anybody from -- have you made any decisions about whether senior people from NNA will join your team?

We have not. We are in the process now of evaluating all of that, and I thought I would take a minute to mention that transition process, because it is a significant event for the Company and I am very pleased. Mike Cannizzaro, who I mentioned in my opening remarks, the Chairman and CEO, and myself are chairing a transition task force and we have had very in-depth analysis of each of the aspects, all of the clinical issues, operational issues, and it would be premature for us at this point in time to give out that kind of information because we have not completed yet.

But I do feel good about the process we have in place and the people that are working on it. They are doing a great job and I think we're managing our way through this very well.

The Medicare bill passed last year includes the implementation of a case mix adjustment in Medicare rates and I wondered what you thought the folks in Washington were trying to accomplish with that and what the impact will be?

Well, Andy, you recall that was -- the plan was to implement this on a budget neutral basis, so I think at the moment it does not look like it is going to make a significant impact on us. And we and other providers are on an advisory committee to the entity that is helping CMS develop those case mix adjustment criteria. So we are talking with them. We know what they are thinking about, but at the moment we don't think it is going to be a major impact in terms of anything substantial in terms of Medicare payments.

Finally on the topic of what's left to acquire? What is ever going to become of DCI?

It will be up to DCI.

Okay, thanks.

I don't think it will be appropriate to comment from our side, Andy.

Very well. Thanks very much.

Carrie Nelson (ph) of Roth Capital Partners (ph) .

A couple of quick questions on the supply-side on your vendor agreements that you mentioned, do you think we will be largely flat in '04? Do you with the Amgen contracts reaching beyond that -- I don't know if the other contracts reach beyond that but do you have any visibility into what vendor costs might be in '05?

We always continue to try to have better contracts, and I think the efficiencies for example in terms of the manufacturing of dialyzers and so on will allow us to continue to provide good contracts to our facilities and we certainly hope to keep it flat if not better, so I don't know that I can give you any more specific guidance beyond that, but we expect that at least for '04 it will be flat.

In addition to the contracting piece we focus very heavily on the logistics management of materials as they come in in terms of rotation of inventory, par values, etc. So we work harder and harder at that, Carrie, along with the contracts themselves.

That's great. And similarly on the labor front, should we think about the Q4 2 percent year-over-year, should we think about that continuing excluding NNA?

We are expecting during perhaps the first half of '04 to be able to keep it within 2 percent range, but as -- if jobs begin to pick up; there is obviously debate on that. But as jobs pick up, as the economy picks up, we expect that we will be under pressure especially on the technician side a little bit, so we built into our planning for the cost of labor to go up at a little more rapid pace during the back half of '04 and into '05 and we certainly feel like it will happen here during the first half of '04.

And that is market specific depending upon what's happening in terms of other opportunities in the marketplace, but I think David is correct. We could see a little bit of that in the third and fourth quarters.

And Carrie, the pilot programs that you talked about, if we decide to operationalize those, they will potentially involve additional staff that will pay off in the long run also.

Okay and then Dr. Hakim, a follow-up question. On the single-use to multiple-use, if you converted NNA, if you choose to convert NNA from single-use back to multiple-use, is there a conversion cost per facility?

I assume there will be, since many of the facilities they have -- have not been designed to accommodate reuse, but really, Carrie, this is premature in terms of the discussions about the cost, because we certainly are far from coming to any conclusions about what we need to do and how we get everybody to agree to those changes, if any. In addition, as I mentioned, as we develop better contracts for single-use, that is going to be always a fluid situation with what the cost difference is between single-use and reuse and what the cost opportunities are for developing reuse centers in these facilities. So I think at the moment we are just deciding to look at the issue, but have not come to any decisions.

There will be a capital cost if we decide to do that but if that is the direction from a patient care standpoint that we go, it is an investment that will need to be made and we will gladly make it.

Sure. Last question is on the buyback. After you complete the $250 million buyback you mentioned your third repeat from a priority for cash flow would be to continue a buyback. When might we be able to see that?

We've got a lot of work ahead of us here. We've got to get this completed. We've got to get NNA transitioned into our book of business. We will continue to look at not necessarily putting additional leverage on the books to buy stock back, but we will continue to look at as a use of our free cash flow, de novos, acquisitions, and share repurchase programs.

I would not expect any more. Once we get this program completed, I would not expect anymore until we get into the end of '04. That is something we will always stay focused on and if that is the most appropriate use of capital at that point in time.

All right, thank you.

A follow-up from John Ransom of Raymond James.

Two quickies. David, what would you use for a good diluted share count number for first and second quarter?

Let me give you a spot share count number at the end of 2003. At the end of 2003, once you give effect all the stock that we had repurchased through the end of December, 47 million plus about 1.5 million as a result of option dilution from all of our stock option programs, so it's 48.5 million and then you've got the completion of the program from January 1 through the end of the first quarter or the first few weeks of April.

Thank you, that's helpful. Secondly how much of your income statement, what percentage of your income statement would respond to a charge master change? And remind us how much that pricing went up, just keeping in mind the big spread that already exists between commercial and government pricing?

Right, it is about 8 percent. Forty percent our revenue comes from private pay. But not all of that is charge sensitive, so probably about half of that is charge sensitive. So you have got about 20 percent of our revenue and about an 8 percent price increase is what we've put in, so that gets to about 1.5 to 2 percent overall revenue per treatment increase excluding any changes in drug utilization both for EPO and the other drugs.

Is that price increase been what you have done in line with the last couple of years?

We've seen it moderate a little bit. If you go back and listen to the last couple years we saw that as high as 10 percent. We saw that moderate slightly and we have implemented the 8 percent and feel very comfortable with it.

So no push back there?

None that we haven’t already talked about.

All right. Thank you.

All right, Billy?

No further questions at this time, sirs.

We appreciate your taking the time to listen to our call today and thank you for your interest in Renal Care Group. Have a great day. Thanks.

Ladies and gentlemen this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.