Fresenius Medical Care AG (FMS) 2004 Q4 法說會逐字稿

Welcome to the fourth quarter 2004 Renal Care Group Inc. conference call. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference is being recorded for replay purposes. I will now turn them presentation over to your host for today's call, Mr. Gary Brukardt, CEO and President of Renal Care Group. Please proceed.

Good morning ladies and gentlemen. I'd like to welcome you to Renal Care Group's year-end earnings conference call. We are pleased to report excellent results for the fourth quarter ending December 31, 2004 in terms of medical outcomes and financial performance.

Participating with me on the call today are Chief Medical Officer Dr. Ray Hakim -- and Dr. Hakim is in Tampa at an annual conference on dialysis -- and our Chief Financial Officer, David Dill, is with us as well. So, let's begin with Doug Chappell, our General Counsel, who has the usual cautionary statement regarding forward-looking information. Doug?

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. These 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 prospects and corporate objectives. Our actual results could differ materially from these forward-looking statements due to certain factors, including payment reductions by private insurers, hospitals and managed care organizations, changes in the Medicare and Medicaid programs, changes in the health-care delivery, financing, or reimbursement systems, risks related to the drug Epogen, compliance with health-care and applicable laws, and our substantial leverage. 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, 2003, our current report on Form 8-K filed with the SEC on April 19, 2004, and our quarterly reports on Form 10-Q filed for the quarters ended March 31, 2004, June 30, 2004, and September 30, 2004.

Thanks Doug. I would like to begin with a brief overview of our results for 2004 and some of our recent activities; then Dr. Hakim will discuss medical outcomes and bring you up to date on some legislative issues; and then finally, David Dill will present a more detailed financial report on the Company. After these presentations, you'll have the opportunity to ask questions of each of us.

Some of the financial highlights for the quarter ended December 31, 2004, which you can see in more detail on our press release are revenues increased to $370.1 million, a 41.1 percent increase over the same quarter last year; net income increased to 32.1 million, a 14.8 percent increase over the same quarter last year; and earnings per share increased to 46 cents per share, a 21.1 percent increase over the same quarter last year.

Since our third-quarter conference call, we have all learned of DaVita's acquisition of Gambro Healthcare, which will further consolidate the dialysis industry. We view the transaction as positive for the industry. In the past decade, consolidation has given dialysis providers more visibility in Washington and has allowed us to speak with a more unified voice as we work together to push through much-needed improvements on behalf of our patients.

If you review clinical results for patients over the past five to seven years, you see continued improvement in patient outcomes as well as improved access to care. The 1.6 percent increase in the composite rate for 2005 and the drug add-on provisions contained in the Medicare Modernization Act are a direct result of our combined efforts. We reaffirm our position that after giving effect to the 1.6 percent increase and the changes in drug reimbursement, the MMA will likely be neutral for us in 2005. The impact is reflected in the range of our 2005 corporate objectives for earnings per share that we communicated to you in October. We believe there are very real opportunities for expansion through selective acquisitions and de novo development, and we will continue to actively pursue both in 2005.

In 2004, the commitment of our 8800 associates allowed us to successfully integrate programs representing approximately 7600 patients, including National Nephrology Associates, our largest acquisition to date. I would now like to congratulate our associates for staying focused on providing our patients with optimal care -- the optimal care that they deserve, and for reaching the ambitious internal targets for clinical outcomes that Dr. Hakim and the Medical Advisory Board set for us. I'd like to also congratulate our team as we continue to meet our operational objectives as an organization.

Now Dr. Hakim will now provide a detailed report on our clinical achievements for the year and what's expected on the legislative horizon. Ray?

Thank you Gary. Good morning ladies and gentlemen. I'm very pleased to present to you highlights of the patient outcomes we follow. I will also be commenting on some of the regulatory and legislative initiatives we have participated in.

As you may have heard earlier from Gary, I'm in Tampa at the annual conference on dialysis where I presented the initial analysis of the Right Start Program. As some of you may recall, this was a pilot project to assess the effectiveness of a focused multi-disciplinary approach to patients during their first 90 days on dialysis. This is a period of time during which we have observed the hospitalization and a mortality rate that was considerably higher compared to the stable prevalent patients.

I will not go into the details of our Right Start Program on this call other than to indicate that in the pilot phase of the project, which included approximately 1000 new starts, we were successful in reducing their hospitalization by 40 percent and their mortality by a similar percentage during the first 90 days. We are continuing the analysis to make sure that this improvement in outcomes extends beyond the initial 90 days, and we will be presenting this data as we analyze it.

Next, I would like to present to you outcome data for the rest of Renal Care Group, and again would remind you that we have started integrating clinical outcome data from the former NNA facilities starting in January '05. So, we will be presenting you combined data starting next quarter. But for this quarter, we will be presenting only RCG data prior to inclusion of NNA facilities.

In terms of dialysis process outcomes, we track the percentage of patients who receive the optimum dose of dialysis. The target set by the RCG Medical Advisory Board is 1.4 -- is (indiscernible) 1.4 or higher, and we currently have 87 percent of patients who are achieving this dose in this quarter. This is approximately 200 basis points higher than one year ago and is consistent with the focus that we have maintained, along with all of our associates, on this important parameter.

In terms of the minimum dose of (indiscernible) 1.2, which is the target reported by CMS, 94.8 percent of RCG patients have received this dose, compared to 89 percent nationally.

In terms of anemia management, the percentage of patients with hematocrit of 33 or greater is 78. And as we mentioned previously, we will likely remain at this level to remain within the hematocrit target guidelines set by CMS. As we discussed on previous calls, both CMS and the National Kidney Foundation are reviewing the recommendations for the appropriate target for hematocrits, and hopefully both will adjust their recommendations according to the recent data.

In terms of hospitalization, our average hospital day this quarter is 12.5 days per patient year (ph), which is about 2 days less than that reported by the U.S. RDS nationally. We are also very pleased that the mortality for this quarter is 21.1 percent. And again, this is approximately 3 percent lower than those reported by the U.S. RDS for all of the United States.

These relative outcomes have recently been confirmed in an independent comparison by an organization called DOPPS, which stands for Dialysis Outcomes and Practice Patterns Study, and which evaluates the outcome of patients within Renal Care Group compared to the rest of the country. So we are pleased to have this validation of having significantly lower mortality within Renal Care Group compared to the rest of the country.

On the regulatory side, representatives of the Kidney Care Partners, which groups together 26 kidney related organizations, have met with CMS key decision makers to share our concern regarding the CMS proposed hematocrit audit regulation to HME regulations, as well as the case mix adjustments that is supposed to start in April 2005. On both of these issues, the Kidney Care Partners -- KCP -- put forth its concerns, and we have come up with proposed solutions that we believe address on the one hand the concerns by CMS, and on the other hand the unintended consequences of some of these regulations in terms of patient outcomes and financial impacts. Kidney Care Partners was pleased with the high-level reception it received at CMS and open-minded way CMS was looking at our proposed solutions. Although, we have not had a definitive response or decision to either one of these issues, we are hopeful that CMS has the elements to arrive at an acceptable solution.

We are also working as a group to analyze the newly released conditions of coverage by CMS. A quick read of these proposed regulations have highlighted some concerns but no major new initiative. However, we are still in the early stages of developing our response and we plan to formulate those within the Renal Leadership Council, which groups together major dialysis providers, and also within the Kidney Care Partners, which as I mentioned groups together about 26 renal-related organizations.

Finally, on the legislative front, as you know, with the end of the congressional session, all pending bills expire. So, we are actively working on reintroducing the ESRD Modernization Bill in this congressional session. And we are hopeful that it will be introduced next month by the original bipartisan sponsors in both houses of Congress who are solidly behind this slightly revised bill from last year.

To recapitulate, the major benefits of the bill includes establishing an annual update framework for the ESRD composite rates, providing Medicare coverage for pre-dialysis education services, improving the home dialysis benefits, and finally, creating public and patient education initiatives to increase chronic kidney disease awareness. The chances of passage of this bill this year is increased because of the recommendation by (indiscernible) for a 2.5 percent update in 2006, and by a planned hearing by the House Ways and Means Committee on the adequacy of payment for dialysis services.

I will stop here and will be glad to answer any questions you may have after David Dill's presentation.

Thank you Dr. Hakim. As Gary mentioned earlier, earnings per share for the fourth quarter of 2004 were 46 cents per share compared with 38 cents per share for the fourth quarter of 2003. Earnings per share for the full year were $1.74 per share compared to $1.37 per share for 2003. This represents a 27 percent increase in earnings per share for the year. The increases in both the fourth-quarter and year-to-date EPS were driven by organic revenue and volume growth, the integration of NNA and other acquisitions that we completed during the year, and the share repurchase program.

Our GAAP results for 2004 give effect to resolutions of contractual issues with payors that favorably impacted diluted net income per share by 4 cents. Excluding the effect of these resolutions, non-GAAP net income for the year ended December 31, 2001 was 118.9 million, or $1.70 per share. GAAP results for 2003 give effect to a non-recurring after-tax charge related to a retirement package for the Company's former Chairman and Founder. Excluding the effect of the retirement package, non GAAP net income for the year ended 2003 was 105.4 million, or $1.41 per diluted share.

Fourth-quarter net revenue increased 41.1 percent to 370.1 million as compared to 262.3 million for the fourth quarter of 2003. Our same-market treatment growth was 3 percent for the fourth quarter and 3.3 percent for the year.

As previously discussed, we elected not to renew certain medical director agreements, which affected our volume growth in the second half of 2004. As you know, our 2005 corporate objective for volume growth is between 3 and 5 percent. We expect the growth rates in the first and second quarters of 2005 to be at the low end of the stated range because they will be compared to periods before these non-renewals. Likewise, we would than expect the growth rate for the second half of 2005 to move towards the higher end of the range.

Patient service revenue per treatment increased 2.6 percent to $318 per treatment, as compared to $310 per treatment for the fourth quarter of 2003. Sequentially, our patient service revenue per treatment increased $4 from the $314 per treatment we reported for the third quarter. The increase in our revenue per treatment is primarily due to an increase in ancillary services we provide, including the administration of ancillary drugs and lab services, as well as the impact of improved commercial pricing.

Patient care costs increased to 66.2 percent of revenues in the fourth quarter as compared to 65.1 percent in the same quarter of 2003. On a per-treatment basis, patient care costs increased 3.4 percent to $211 per treatment, as compared to $204 per treatment during the same quarter last year. This cost increase is due to increases in the utilization of drugs, primarily EPO. The increase was also due to generally higher salary and benefit cost, lease cost, and routine supply cost experienced in the former NNA facilities.

In the fourth quarter of 2004, our annualized labor cost increase was approximately 5 percent, principally as a result of the NNA transaction. Excluding the NNA facilities, our labor cost increase would have been under 3 percent for the year.

Year over year, our G&A costs were flat at $26 per treatment and 8.2 percent of revenues. Sequentially, from the third quarter to the fourth quarter, G&A costs were up $2.90 per treatment. In the fourth quarter we incurred additional legal expenses as we began to respond to the subpoena we received in October requesting documents related to our testing for PTH levels and vitamin D therapies.

We also expensed additional cost related to travel, consulting, and legal fees for acquisitions that we considered carefully but did not consummate. Our management team attempts to look at all acquisition opportunities in the dialysis industry. However, we remain disciplined in our approach and committed to achieving specific returns for our shareholders. There will be times when we decline opportunities that do not meet our investment, operating or clinical parameters. Total costs related to acquisitions that were not consummated and the subpoena during the quarter represented approximately $1.7 million, or $1.50 per treatment.

EBITDA for the fourth quarter increased by 22.7 million, or 36 percent, from the fourth quarter of 2003. Our EBITDA margins declined slightly year over year to 23.2 percent of revenues as compared to 24.1 percent of revenues. We anticipated this margin declined as a result of adding NNA to our consolidated operating results, and despite the $1.7 million of cost related to the acquisition cost and the subpoena, our EBITDA margins improved sequentially from 23 percent in the third quarter to 23.2 percent in the fourth quarter.

Our balance sheet at December 31 of 2004 reflected $17.9 million in cash. The total debt at December 31 was 503.6 million, down 12.9 million from the third quarter. Based on fourth-quarter annualized EBITDA, our leverage is approximately 1.5 times, our return on equity increased to 21 percent, and days sales outstanding were 68 days.

Our priorities for free cash flow have not changed. First, we plan to open between 20 and 25 de novo facilities during 2005. Secondly, we will make selective acquisitions that meet our return parameters. And finally, we will repurchase shares of our common stock. In 2004 we acquired approximately 4.5 million shares of our common stock at an average price of just over $30 per share. We acquired dialysis programs providing services to approximately 7600 new patients. NNA made up a large portion of that figure, but we also added more than 2000 patients through other strategic acquisitions, exceeding our corporate objective for the year.

For the fourth quarter, capital expenditures were 32.3 million, comprised of 22 million of maintenance CapEx and approximately 10 million of investment CapEx. During the fourth quarter of 2004 we opened three de novo facilities, taking our 2004 de novo total to 24 facilities. We believe that we are on schedule to open between 20 and 25 in 2005.

Finally, we plan to adopt Statements of Financial Accounting Standards 123-R on July 1, 2005, and we will begin recognizing compensation expense for our employee stock options at that time. With an expected impact of approximately 8 cents per share in 2005, expensing stock-based compensation will move us to the low-end of our 2005 EPS range of $1.95 to $2.05 per share.

If you have any questions I'll be glad to address them. Gary?

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

(OPERATOR INSTRUCTIONS). Darren Lehrich, Piper Jaffray.

Just a couple of things here. Just hoping to get a little bit more commentary on the same-market treatment growth. You know, we've obviously heard the issue regarding medical directors. I'm just wondering if you can comment a little bit more on whether you are also seeing a greater level of competition in your markets or any other factors that may be driving this down towards the lower end of your range. And if you could quantify for us, perhaps generally, the number of medical directors we're talking about here.

This is David. I will start. The range that we've given you for next year has not changed from what we said back in October of 3 to 5 percent. The decline, just slightly from 3.2 to 3, is a direct result of those medical director agreements that we talked about. There were only a couple of medical director agreements that we elected not to renew. Because we lost those patients during the third quarter, the fourth quarter has the full quarter effect, if you will, of losing those patients. So, we were expecting this to be in this range. There's a lot of programs that we spent a lot of time talking about as a company. Dr. Hakim spoke briefly about those a moment ago related to the Right Start Program, but there's other programs that we have that we think once we work our way through the next couple of quarters on comping out of these patients that we lost related to those two medical director agreements, then we will begin to move up in the range closer to the midpoint and hopefully even above that as we get to the back half of 2005.

As David stated, we're comfortable with our objective for '05, and we have been working on a lot of different initiatives. We're working on a CKD initiative, kind of kidney disease initiative, which we think will -- working with our affiliated physicians will unable us to have a good transition between the practice and initiation of dialysis. And that is very important in terms of getting a good start for those patients. So we're looking at a CKD initiative as we go into '05. We have been working on that for the last several months.

We're also looking at vascular access management. We think that is an important element in terms of patient satisfaction, good care for the patients, and the impact that it has on whether or not people dialyze in our centers. We are constantly working with our physicians on the medical staff development, ensuring that as practices mature, new positions are added and we grow in that respect.

And then I'm going to let Ray comment a little bit on Right Start, our diabetes case management. We're also working on de novo development continually to make sure that process works well for us. So, there's a lot of initiatives that we have in place. It's not a single approach to that, but there are many. And that's just kind of an example of things that we're doing. Ray, do you want to make a few comments on some of the clinical initiatives?

Sure, and I also perhaps want to start by telling Darren that we were successful in renewing every medical director agreement that we wanted to continue. I think we feel very fortunate in that the sense we have from our medical directors is that they always feel that this is the right affiliation for them. But in some cases we have elected not to pursue those renewals. So, I think we should with that in the context of this.

In terms of the Right Start, I think, clearly, our pilot studies have been very encouraging for us. We want to continue analyzing that a little bit more to see whether the impact in terms of the improvement in hospitalization and mortality extends beyond 90 days. We need to look at that and make sure that it is. But at the moment, we have been also actively pursuing the expansion of the Right Start Program both in terms of where else we're going to be doing that program, and also the contents of the program, to include specifically data -- to include specifically activities related to the diabetes, which was not an integral part of the Right Start Program in the pilot phase, and also to extend it to areas of what we call patient empowerment and self-care where I think we get the best outcomes when the patients themselves are focused on their care also. We are at the beginning phase of the analysis, but we are very hopeful that the analysis will confirm these trends and we'll be able to expand it to other areas within Renal Care Group.

One just quick follow-up if I could. If you could just maybe give us a sense for what NNA's same-market growth was so we can just get a feel for how that may impact your results going into, I guess, the second quarter of '05.

As you know, we will not be reporting the NNA results in our same-market treatment growth for the first quarter, but once we have operated that for a full 12 months, which will begin on April 1. Their growth rates so far are roughly in line with Renal Care Group's at the low-end of the range, so we don't expect that it will benefit us any nor hurt us any from the current levels that we are reporting.

Gary Lieberman, Morgan Stanley.

A couple of questions. First, looking at your revenue per treatment. Is it safe to assume that you didn't see too much in the way of increases in your commercial contracts in the fourth quarter, and that the majority of them would go through in the first quarter?

As you know, Gary, consistent with what we have done for about the last five or six years as a company, we implement our price increases to our commercial payors during the fourth quarter. The fourth-quarter revenue per treatment was benefited for a couple of reasons. One, this is the first quarter that we reflected all the NNA patients in our lab in Jackson, Mississippi. There was a small impact of the commercial price increase as well that we pushed through during the fourth quarter. So a piece of that is in. As we get into the first quarter, there will be a little bit more carryover from that. And then, obviously, we've spent a lot of time talking this year about we will continue to renegotiate NNA contracts as they come up for renewal. Some of that impact will roll through the numbers in 2005 as well if we're successful in getting those done.

Was the timing any different in this fourth quarter? Did the managed care increases start to go through later in the fourth quarter or the same time as they have in the past?

The same time.

Fairly consistent.

Just sort of one follow-up on the patient count. Is there -- when you look at the de novos that you did in the quarter, would most of them or all of them be included in the same-market treatment growth, or would some of them fall outside of the same-market treatment growth statistics? Simply because the patient count looks a little bit stronger than at least I was looking for, but your same market percentage growth is still towards -- at the lower end of your range.

Clearly, the de novos that we opened, we did open those up in the fourth quarter. There were three that we talked about. We include any de novos that are in our existing markets that we operate in in our same-market treatment growth. All three of those were inside our same-market treatments; however, they didn't open up until toward the end of the fourth quarter. So what you get, you get the benefit in your patients count of all the patients, but your quarterly treatments are not impacted very much at all just given the fact that they came on late in the quarter.

When they open.

John Ransom, Raymond James.

Just a couple of quick ones. Approximately what percentage of your medical director contracts come up for renewal each year, and what is the historical benchmark for renewing those in terms of percentage? And secondly, is it fair to say that commercial pricing increases have been a little bit better than you felt they might have been 12, 18 months ago?

This is Doug Chappell. In terms of medical agreements coming up for renewal each year, it's approximately 10 to 15 percent every year. We also choose often to renegotiate them and extend them before they expire. So, we are always working on that. I don't have a specific number. As Dr. Hakim said, we've been very successful renegotiating those. We have a couple of losses in a couple of markets that were basically our choice. And as Ray said, we have successfully renegotiated all the ones that we wanted to.

John, the second part of your question?

Just to follow-up. So, is it fair to say that historically more than 90, 95 percent of those are renewed? The ones that you want to renew are renewed?

Yes.

The second part -- since David talked about commercial pricing, has the commercial -- has the managed care pricing environment been a little bit stronger than you might have thought 12, 18 months ago? And if so, what is your outlook for the next 12, 18 months? Thanks.

I do think it's probably a little bit stronger than what we thought 12 or 18 months ago. We had anticipated back in October that we would be able to achieve between 8 and 10 percent price increases across our entire commercial base. We are three months after that now and we still have a lot of visibility and comfort with that number. Gary talked about the transaction with DaVita and Gambro; I think this helps us as well, just solidifying pricing in the marketplace. And we feel very confident of where we are now.

Is there anything tangible that you can point to from DaVita Gambro other than pricing? Are you seeing any hints that you might see some acquisitions or divestitures or unhappy physicians, or anything like that coming out of this?

We've talked about commercial pricing. It's early at this point. They're still going through FTC. Just around the edges, we do think that the consolidation will continue in the industry. Don't know about the physician relationships that they have, either on the DaVita side or the Gambro side. We have got a plan on our own of acquiring between 1000 and 1500 patients, and we feel confident we'll be able to execute that plan.

Matthew Ripperger, Smith Barney.

First question is related to the CapEx in the quarter. It was 32 million. That was a little higher than we were looking for, and you said maintenance was 22, and 10 was growth. I just wanted to see if you could provide a little more color as to what the components of maintenance CapEx was in the quarter, and whether that as a percent of revenue is a good trend line going forward?

Our stated target -- 95 to $100 million of CapEx going forward, which includes de novos. If you remember back during the initial introduction of the NNA transaction, there were some catch-up investments that we were going to make into the NNA clinics. Most of those are now completed. There was some money that we spent in the fourth quarter related to that. On an ongoing basis, from a maintenance standpoint, you should expect something around $70 million a year, with the remaining $30 million to round up to 100 coming in those 20 to 25 de novos.

Of the 10 million in CapEx on growth this quarter, how many de novos does that imply you started opening?

As you know, we count openings when we get all the certifications necessary to take care of that first Medicare patient. So, we're constantly building. We opened three de novos during the quarter but we spent $10 million. So, take that to mean that there's a lot of other de novos that are in the pipeline that are in (multiple speakers)

-- (multiple speakers) for the first quarter of '05, and things are always in process and moving.

But your stated target for '05 is still in the range of 20 to 25 to novos?

That's correct.

The second question is, Fresenius on their conference call specifically mentioned that one of their strategies for '05 was to basically double the number of de novos that they have been opening, something in the 50 to 60 range. I just wanted to get your thoughts on whether you think this new capacity that's being added to the industry would have any impact in your markets, and whether you're seeing any kind of systemic change in the macro competitive environment with them and others in the sector?

We clearly see Fresenius stepping back up in the marketplace, as you referenced, the investment in de novos. We also noticed that they are planning on spending some capital in the U.S. on acquisitions. It doesn't change our plan, the discipline that we have as a company. We would love -- Gary and I would love to go out and build 50 new units. But given our footprint, given the return targets that we have, given the demographics and the physician relationships that we're comfortable with, the 20 to 25 number makes the most sense. There's nothing magic about that number. If more opportunities come our way that fit the return criteria that we need, coupled with they're in the existing footprint, we will take advantage of those. And it's not a problem of physically getting the units open, it's just the disciplined approach of our footprint that limits us to that 20 to 25.

Last question I had for Dr. Hakim is we still have the case mix adjustments still outstanding -- I wanted to get your thoughts in terms of timetable for that, and whether there was any chance of any kind of material revision to sort of the preliminary proposal related to the case mix adjustment?

Yes, Matthew. We have made presentations -- and by we I mean it's really been a wonderful combined presentation by all the KCP members -- to dig into the case mix adjustment that CMS has proposed. We feel there are some areas that really don't make sense in terms of adjusting for body mass index on one end of the spectrum, and then body surface area on the other. And clearly, we have been focused also on whether the neutrality factor has been calculated correctly, because that depends on the weight that they consider the base line.

So, we have made specific proposals to CMS on that. And frankly, we think our proposal to them is to add this as a pilot project initially to see the overall impact before launching it in one fell swoop across the whole industry. Overall, I mean, clearly, CMS and (indiscernible) legislation is committed to making this budget neutral, and so we don't think it's going to be materially impacting any particular company as such. But on individual facilities it may change things around a little bit depending on the mix.

But more importantly, I think what we are focused on is to make sure that it's done right so that no adverse outcomes are expected from these changes. So, will we be successful? That still remains up in the air in terms of getting CMS to agree to pilot this, rather than to pull the switch on April 1 and everybody sort of gets going on it. So, we are still working on that, and we have not heard one way or the other from CMS on that proposal.

Eric Percher, Thomas Weisel Partners.

I had a question on the 1.7 million in additional G&A cost. That's both from -- first of all, just to clarify -- that's both from acquisition-related expenses that you didn't consummate, and then also the legal costs. And then, I guess, second to that -- will the legal cost continue, or do you just sit tight at this point and wait for awhile before another bolus of legal cost?

The 1.7 million does include both. The vast majority of that relates to the acquisition cost, but there are about 15 percent of that number related to subpoena cost. I will kick it over to Doug. We do expect that to continue, at least in the short-term.

Eric, we think that -- right now we are in the process of pulling responsive documents. We have had additional meetings with the U.S. Attorney's Office in the Eastern District of New York. It appears that we are going to continue to experience some costs related to this, at least in the first quarter and probably through the second. Beyond that, it's really hard to say. They appear to be fairly receptive to carving the subpoena back, but even the carved back version requires a lot of work to review the documents.

Is that a -- after Q2, we just don't know where it goes? That's not an indication (indiscernible)

That's right.

A question for Ray. If you could remind us who the legislators are that were most in support of the ESRD Bill, and who you think will be most involved as we reintroduce that?

On the Senate side it's going to be Senator Santorum and Senator Conrad. On the House side it's Representative Camp and Representative Jefferson. Senator Santorum, as well as Conrad, are members of the Senate Finance Committee. And these are important members that hopefully will make the case for us. And on the House side, they are both members of the Ways and Means Committee also.

But frankly, we have also been able to develop a number of other supporters. We have been -- as you know, we introduced the bill last year to be able to use it to educate members on the issues that we are currently facing. We did not expect the bill to be approved last year because there was no chance of -- there was no Medicare-specific bills per se. This year we think there is a higher chance. And clearly, the fact -- a lot of members sort of rely on Metback's (ph) recommendation to make up their minds. And we are very pleased that Metback's recommendation was in favor of an increase. It didn't come spontaneously. It took a lot of work from a lot of us working with the Metback members. And we are really pleased that they have agreed that this industry does need an increase in '06.

So, other than those four that I mentioned which at the moment seem to be committed to reintroducing the bill hopefully sometime next month, we are working on other supporters. But, we want to have the bill first before we start getting them to co-sign or co-sponsor the bill.

Justin Lake, UBS.

Two quick questions. One, you mentioned the impact of stock options, that 8 cents. Can you talk a little bit about what you're seeing there as far -- is that a two-quarter number, or is that for the full -- is that the impact of laying that over the full year?

It is the impact of adopting that standard effective July 1. In our footnotes you've seen consistently that the effect is 13 to 14 cents a share as we layer on new programs and old programs roll off. And our share count being reduced by the share repurchases that we have completed this year -- the full annual impact would be something in the neighborhood of 15 to 16 cents a share, and the 8 cents is our estimate at this point for the back half of '05.

You mentioned stock repurchases. Does that -- I might have missed this. Did you do anything this year?

We did complete the $250 million program. We completed that at the end of March or the first couple of days of April. We have not bought any stock back through the end of the year. So, there was zero stock repurchased from April 1 through 12/31.

I guess I'm talking about '05 now. You have -- I guess you could do about 75 million, if I'm remembering correctly.

Our current authorization is about 75 to $80 million. Part of our plan -- as we've said, we would buy back between 80 and $100 million of stock back. We will go into the market opportunistically. We won't be making any announcements on when we do that.

Is that included -- I guess you said that 8 cents was going to push you towards the lower end of your guidance. So I guess when you -- you're assuming that your current operations, ex stock options, are going to put your numbers at the higher end of that guidance range, or actually at the high-end?

We've given you a range of $1.95 to $2.05. After the 8 cents, we still feel comfortable with that range, but we've clearly moved to the bottom-end as a result of it.

That doesn't include the benefit of any repurchases, or does it?

None other than our stated target is to acquire back 80 to $100 million a year. As part of our 15 percent growth plan, that's embedded in there.

Okay. So it doesn't include -- just not depending on when you're opportunistic during the year?

That's right.

The other question is you mentioned you are attempting to renegotiate your -- some of the NNA contracts. Can you give us a little bit of an idea of how that is going? And your ability -- I guess you're trying to get those contracts up more to the rate that you see, especially in the same markets? Can you give us an idea of the tenor of those negotiations, and how receptive the commercial payors are to kind of moving them up to your rates?

While we think generally the commercial pricing environment is a little bit better than what we thought 18 months ago, it's still very, very difficult. We're still working with commercial payors on a daily basis, not only looking at the Renal Care Group book of business, but also these NNA contracts. I would be remiss if I didn't say they're not open and receptive to it, but we've got a lot of things that go in our favor. We use the leverage that we have, coupled with the leverage that they have in local markets, and try to come to a happy negotiation and medium between the two. We have been successful in some cases so far, but it is a long process. You won't see any one quarter that's benefited greatly by cleaning some of those contracts up. But little by little, over the course of the next year we do expect to make some headway.

Last question on cash flow. Do you have a cash flow projection for next year, cash flow from operations?

In '03 the number was about $186 million. This year it was down to about 178 million. One of the things that I talked about in my prepared comments were the days for the Company have increased during the year by about five or six days, if you go all the way back to the first part of the year. That's a result of provider number issues working very closely with our physical intermediaries. As a result, that cash flow was down about 10 or $15 million below what we had expected. So, I expect overall cash flow from operations to increase on a year-over-year basis by about 10 percent a year, plus any catch-up than we make on bringing days back down once we get those issues result.

The stock option benefit for '04. Do you have that number handy?

You mean the cash flow that we generated?

Yes. From the tax benefits.

Overall, the cash that we generated was about $21 million. The tax benefit, I think -- I don't know that number off the top of my head.

Ryan Daniels, William Blair.

A couple of quick housekeeping questions up front. David, I noticed that the tax rate was a little bit higher this quarter, a little bit over 39 percent. Should we expect that to persist into '05, or will you trend back down to the 38 percent range where you have historically been?

Renal Care Group was historically at 38 percent. After giving effect to NNA, the right rate we feel going forward, after we've reconciled all the accounts and spent this year looking at it, it's about 38.5 percent. The NNA tax rates are a little bit higher than ours just because of some of the states that they operate in have higher tax rates than the overall Renal Care Group states that we operate in. The 39.1 percent -- you're exactly right. It is a little bit higher this quarter by about $300,000. And those are just some catch-up adjustments that we needed to make, and we got those recorded in the fourth quarter. But going forward into 2005, you should expect 38.5 percent.

Doug, I think I heard you mention that they are carving back some of the DOJ investigation. Can you talk a little bit more specifically about that? Is it just more focused now on the vitamin D therapies and labs as opposed to a broader document review, or is there something else?

As we said in November, it's clear that what their principal focus is on are vitamin D therapies and the PTH testing. What they have done as we've worked with them is really around the edges. It's not indicating any sort of different focus, it's just a matter of what sort of documents they're looking at, particularly in terms of electronic (technical difficulty) production.

David, a quick follow-up on Justin's earlier question about NNA and revenue per treatment. Can you give us a feel, now that you have done some negotiating of commercial contracts and moved their lab into renal labs, what their revenue per treatment is versus the core RCI assets?

We're not going to break out the specifics. They are still a little bit below ours for the reasons that you just pointed out. One, we do think long-term on the commercial pricing front related to managed care contracts we'll make a little headway. There will be some wins, there will be some losses. But overall, we expect to have a net positive through that process. The lab is now fully on. But the third thing is their footprint is different than ours. So, expect them to be still slightly below the Renal Care Group averages of $319 a treatment that we recorded for the quarter. On the cost side, we've made a lot of headway. The operators have done a real nice job of integrating the operations in, controlling cost. And as we enter 2005, the labor targets that Gary and Tim Martin have both set for the operators around the country were in line with what we had expected.

We're on target as we move through the first quarter of '05.

Last question I had -- Dr. Hakim, hopefully you're still on. I was curious when you mentioned the condition of coverage or participation that there were several concerns that you guys had that you're going to address. Can you talk a little bit more about what your concerns are specifically and how you're going to address those going forward, and how receptive the legislators may be?

Ryan, first of all it's primarily the regulators. It's primarily CMS, so legislators probably are not going to be involved in those discussions. Really there are qualitative different -- qualitative concerns that we need to be aware of and figure out how they impact operations and manpower needs and so on. So, it's really a little bit too early for us. We are gathering comments from a number of people that we have designated as reviewers of the conditions of coverage, and we will gather everybody's comments and then roll them up into a Renal Leadership Council position that, as you know, groups together all the providers -- at least we'll be among all the providers -- and then eventually to the Kidney Care Partners.

So, to say we have concerns -- you known, when you read it in black and white, what does it mean exactly when it says they want to focus on making sure that transplant referrals get done? Is it the facility issue? Is it a physician issue? Are they going to require specific people to be in charge of this and in charge of that, or does that mean that we can designate people to focus on this issue? So, it's really a qualitative concern rather than oh my God, look what they are asking us to do now type of thing.

Gary Taylor, Banc of America.

Most of my questions have been answered. I wondered if I could ask Dr. Hakim a couple of questions about that the Right Start Program. I guess what I am interested in is a couple of things. One, does that program use a reusable or single-use dialyzer? How long does it take for a program like that to really become marketable? And do you see programs like that as a revenue opportunity with commercial payors, or really just complementary to the overall value that you provide to them?

Gary, I will try to answer those questions. You may have to remind me of some of them. These -- the Right Start Program that we have had are in pre-existing markets and pre-existing facilities, the vast majority. We do not impact the reuse conditions of the dialyzers. If they are in markets where there was no use, we continued them on this. If they are in markets that they are under-used, we continued them on that. And the vast majority have been under-used. That's one issue.

Second, in terms of the impacts on the financial income outcomes of the Company, clearly, to the extent that we have continued to improve the care of these patients and they are not in the hospital and they are living longer, then we feel that that is going to eventually be a positive impact. However, it does require at the moment designated people to carry out this program. So, that's one of the costs. But on a cost/benefits ratio, we still feel that that's the right thing to do, particularly for patients. And then, as we have always said, we'll try to do the right thing for the patients, and then the rest of it will take care of itself.

On the other question on how fast we can deploy this program -- what we are at the moment is in a phase where we are learning from what we have done. Where can we do better? What are the things that we have done? For example, we -- one of the things that we were working on is to improve nutrition in these patients. It didn't work in the first year or so. And then we realized that the teaching that we were doing needed to be changed. And since that time it's greatly improved. So, how we roll all of these lessons learned programs in the new Right Start is something that we're working on. As we mentioned also, we're going to add a much more focused approach to diabetes in these first 90-day patients. And hopefully we will see even more improvement in our outcomes -- in the patient's outcome. At the moment, we plan to roll it out gradually over the next year over ORCG (ph).

Balaji Ghandi, Pacific Growth Equities.

I just had one question, David, on the DSOs. You talked about 5 to 6 days was the uptick during the year. How much of that would you say is NNA related? And how much -- you talked about maybe seeing some moderation there. How much could we expect over the next two years, let's say?

About half of it will be NNA related and the other half will be provider number issues related to some of the other transactions that we closed, primarily at the end of the year -- Las Vegas and the Danville transaction. We have some working capital buildups there. We fully expect that -- the vast majority of both of those issues to be cleaned up toward the end of March, and if not, early parts of April. We're working very diligently on those. February collections so far look good, but there's still some ways to go.

So your 10 percent operating cash flow guidance assumes some kind of improvement there?

It does. And I'm thinking of that more in terms of the 10 percent. As we continue to grow the business from an acquisition standpoint, from an organic volume and pricing standpoint, our cash flow ought to grow at about 10 percent a year. And then, over and above that, the catch-up related to the buildup that we saw in '04 cleaning itself in '05 should provide some additional cash next year.

Just one Washington question. I don't know who -- maybe Dr. Hakim could answer this. For 2006, with the Medicare Part D benefit, at least as much as we know at this point, anything that you think about changing -- the revenue stream or the types of drugs that you guys deliver, and where they would be delivered under Part D?

Not that we can see at the moment. Only put -- most of these medications that we currently use intravenously are ones that there is no equivalent orally yet. So, we don't expect much of a change, and clearly, compliance issues with oral medications is a big issue. Hopefully what this will -- the Part D benefits will help us with is in terms of having more patients be more aware of their phosphate binders and be able to purchase it or get it without huge cost to them. Similarly for all the multivitamins and the blood pressure medication. So overall, clearly, we feel that Part D will hopefully in the long-term improve outcomes of patients, because they can afford the medicines that the physicians would prescribe for them. But in terms of Renal Care Group financial outcomes, we do not at the moment see change in the financial impact.

So you'd continue to see the drugs that are being administered intravenously stay that way?

Yes.

David Dempsey, Avondale Partners.

A question on the patient care cost. It was certainly good to see that come down a little bit sequentially. Directionally -- I mean, are we headed in the right direction here looking forward with the integration of NNA moving the right direction. Do we see that cost coming down to levels that we've seen historically, or is this going to top or bottom out at a little higher level?

It will bottom out at a higher level. The Renal Care Group patient care costs were, before the NNA transaction, about 203 or $204 a treatment. We are at about $211 a treatment now. As we pointed out earlier, some of the operational improvements at the operating level that we were expecting were achieved or in the process of being achieved at the end of the fourth quarter. So, we should have a little momentum going into 2005. But even after we make those adjustments, you should still expect our overall patient care cost to be in excess of where we were previous to NNA because of the footprint, because of the single-use dialyzers, and many of the things we have already mentioned.

And then one other one. This may be little bit bizarre. As I look at the same-market treatment, is there any likely -- is there any potential impact? You heard a lot about the disease management companies having success in diabetes and improving outcomes there and reducing utilization. Is there anything there that could cause the same-market treatment growth to be down some? And if so, how do you respond to that internally? I know you've got some initiatives internally that you're look at. Is that something that would be a focus that we would look for to try to get that number up, or to take advantage of the opportunity there?

Ray, you want to address that?

I think, David, there are some pilot projects or demonstration projects that CMS is going to embark in relating to bundling related to, potentially, disease management. At the moment, incidentally, of all the disease in which they want to do disease management, CSRD, chronic renal disease, was excluded from that program. But we don't see these as really necessarily bad; in fact, we think they're good. Because to the extent that there is disease management, hopefully what will happen also is that the patients that do progress will come to dialysis in better shape than what we see them right now, in terms of having permanent access, better nutrition and so on. Overall, disease management is something that we would say under the right circumstances will be helpful most of all to patients. And then secondarily, because if they live longer and they are not in the hospital, then we are all better off for that.

On a near-term basis, could that kind of stunt the growth a little bit, with a tail coming out later on?

I don't see it that way, David. I will need to think about it some more to maybe understand the ramifications of what you're trying to ask. But we have had some programs with disease management, and frankly, we think it has not impacted the growth of the program in those markets at all.

Given the markets, David, that we operate in, we don't see any impact on the growth rate as a result of that.

Mia, thank you. We appreciate you listening to our call today and we appreciate your interest in Renal Care Group. Have a great day.

This concludes your conference. You may now disconnect.