Dialysis Corporation of America Q4 2008 Earnings Call Transcript

| About: Dialysis Corp (DCAI)

Dialysis Corporation of America (DCAI) Q4 2008 Earnings Call March 6, 2009 10:00 AM ET

Executives

Andrew Jeanneret - Chief Financial Officer

Stephen W. Everett - President and Chief Executive Officer

Analysts

Darren Lehrich - Deutsche Bank

Nicholas Jansen - Raymond James

Operator

Good day ladies and gentlemen and welcome to the Dialysis Corporation of America Fiscal Year 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session with instructions follow at that time. (Operator Instructions). And as a reminder, this call is being recorded. Now your host for today's conference, Chief Financial Officer of Dialysis Corporation of America, Mr. Andrew Jeanneret. Sir, please begin.

Andrew Jeanneret

Thank you operator and welcome everyone to our 2008 fourth quarter conference call. My name is Andrew Jeanneret. With me is Steve Everett, our CEO.

I will start the call with our obligatory forward-looking statement disclosure. During our call, we may make forward-looking statements which can generally be identified by the content of such statements or the use of forward-looking terminology that includes statements that do not contain historical facts. All such forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our SEC filings included in our most recent quarterly report on Form 10-Q and our Annual Report on Form 10-K. Our forward-looking statements are based on information currently available to us and we undertake no obligation to update these statements, whether as a result of changes in underlying facts, information, future events or other developments.

I will now turn the call over to Steve.

Stephen W. Everett

Thanks Andrew. Good morning everyone. As you know, we announced our results for the fourth quarter and the full year of 2008 yesterday. I want to spend just a few minutes providing you with a business update before Andrew covers the financial results, and then we'll be happy to take any questions that you may have.

First, a few data points. We are now operating 37 outpatient dialysis centers, providing acute treatments in 11 hospitals and caring for approximately 2000 ESRD patients in our centers. All totaled, we provided slightly more than 272,000 dialysis treatments last year.

On the clinical front, we made several progressive steps in improving what has already been excellent quality care. Our Kt/V greater than 1.2, which is a measurement for the adequacy of dialysis, was slightly above 97%, an excellent statistic.

Our anemia management for the year resulted in hemoglobins greater than 11 to be roughly 82%, which is a nice jump over our 2007 results.

And finally, our access management continues to improve, although we still have some more work to do. The '08 results had about 56% of our patients with fistulas in place.

As a provider of life sustaining services, we know that we have an important job to do on behalf of the patients who we care for. That's what we are all about and we don't lose sight of it. We also hope and fully expect that the level of reimbursement that we receive to move more and more towards clinical outcomes-based systems. We are in very strong position for that and we expect to be rewarded when it happens.

Our new business development continues to progress well with the closing of the acquisition of our largest center to date occurring at the end of last year and the ongoing progression of deals that are at different levels of completion. In spite of the current global economic crisis that we are all facing, it appears that the physicians we are working with continue to have both the desire and the means to invest in this business, which we obviously believe is the right directional move for them.

Our long-term growth strategy remains unchanged and the '09 facility additions are on track with three to four centers potentially being added to our group in the near future.

On the administrative front, the company continues to put in place advances that both improve efficiencies and financial performance. Our Clinical Information System is on track and in place at the centers that we have intended. Importantly, we remain on schedule for rolling out the system wide in the months ahead.

As discussed during our last call, we have also completed a total facial makeover of our company from a new logo to a new website to new marketing collateral. And the reviews have been very positive and we hope the message is clear that DCA is a very professional company with one clear focus: a commitment to quality.

With that, I'll turn the call over to Andrew to discuss the financials. Andrew?

Andrew Jeanneret

Thanks Steve. I would like to discuss our 2008 fourth quarter and annual results. Our operating revenue for the fourth quarter of 2008 was $23.7 million, an 18.4% increase over the $20.0 million in the fourth quarter of 2007. For the year, operating revenue was $86.8 million, a 16.5% increase over the $74.5 million for 2007.

Our total treatments were 70,276 for the 2008 quarter and 65,664 for the 2007 quarter, a 7% increase quarter-over-quarter. For the year, total treatments were 272,452, an 8% increase over the 252,326 for 2007. Average revenue per treatment was $333 per treatment for the fourth quarter of 2008 versus $313 a treatment for the fourth quarter of 2007. For the year, we averaged $314 a treatment, a 3.7% increase over the $303 per treatment for 2007.

Our EPO revenue was about 27% of our medical service revenue for both 2008 and 2007 and we saw our utilization increase in 2008 a few percentages from 2007.

Results for the fourth quarter of 2008 also include approximately $64,000 of start-up losses associated with new facilities and $641,000 for the 2008 year.

Our operating income was $2.2 million in the fourth quarter of 2008 or almost $600,000 more than the fourth quarter of 2007. However, in the fourth quarter of 2007, we benefited from the last of our NOLs. This is the primary reason why our fourth quarter of 2008 tax expense was almost $500,000 more than 2007.

In addition, a few of our joint venture facilities with larger minority interest ownerships had better 2008 fourth quarter results than 2007, which means more minority interest expense to DCA. This is the primary reason for the increase in minority interest expense of almost $200,000 when comparing the fourth quarter of 2008 to 2007. Both of these factors affected the decrease in net income when comparing 2008 to 2007.

Net income for the fourth quarter of 2008 was almost $0.9 million versus about $1 million in the fourth quarter of 2007. For the 2008 year, net income of $2.8 million versus about $3.1 million for 2007.

Diluted EPS was $0.09 for the fourth quarter of 2008 versus $0.11 for the fourth quarter of 2007 and $0.30 for the 2008 year versus $0.32 for 2007.

Last quarter, I mentioned our investment in SG&A costs in 2007 would impact comparing SG&A costs for both the quarter and year-to-date results for 2008 and 2007. This continues to be the major reason for the corporate SG&A increases in the 2008 fourth quarter when compared to the fourth quarter of 2007 and is primarily driven by incremental compensation costs. Facility SG&A cost is mostly impacted by the addition of new facilities added in 2008. During 2009, corporate SG&A comparisons will be on a more comparable basis to 2008.

Cash operating activities provided $11.3 million of cash for the 2008 year. We used about $2.5 million of our cash for normal or maintenance CapEx and about $1.4 million for de novo construction. We also used $9.2 million for two acquisitions. We ended the year with $6.5 million in cash and a little over $13 million in debt drawn on our credit line of $25 million.

Our DSO was 84 days at the end of December, down from 89 days at the end of September 2008. With the acquisition of DCA of Hyattsville on December 31, 2008, we need to file a change of ownership, or CHOW, with CMS. In the meantime, we will not receive cash for our Hyattsville Medicare activity from CMS until the CHOW is finalized and this can take several months. And we now have a new financial intermediary with that acquisition. Unless this is completed in the next few weeks, I would expect our DSO to increase slightly in the first quarter of 2009 as these new facilities are larger.

I'll now turn the call over to Steve.

Stephen W. Everett

Just a quick comment regarding the overall impact of the current economic situation that we are all facing and its potential long-term impact on DCA.

And while we are certainly in no position to predict what may or may not come out of Washington in the months ahead surrounding potential healthcare reform, we do remain confident in our specific industry and our company. We continue to feel somewhat isolated and insulated from many of the concerns that are plaguing our economy.

To reiterate a couple of points that I made last quarter, DCA's strong balance sheet, the expected bundled payment system in 2011, the potential extension of the MSP, all that coupled with our strong and predictable revenues streams should continue to benefit our industry and our company.

And with that, we would be happy to take any questions that you may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question is from Darren Lehrich of Deutsche Bank. Your line is open.

Darren Lehrich - Deutsche Bank

Hi, good morning everyone. A few things here. I just wanted to go back to some of your commentary on the SG&A. And Andrew, if I heard you right, I think you said that '09 would be similar to '08. And I just want to clarify, do you mean on a percentage basis, do you mean that the dollar amount in the fourth quarter is kind of right run rate level? Can you just maybe expand on that a little bit?

Andrew Jeanneret

Sure, Darren. What I was talking about on the corporate SG&A was the type of costs that are in there for 2008 and 2009 will be there for the full period. When we were comparing 2007 and 2008, we talked about our investment and costs added in different times in 2007. So it didn't have a full year of the same kinds of costs to compare '07 and '08. We will for 2009 when comparing to 2008.

Darren Lehrich - Deutsche Bank

Sure. Okay, so, when I think about the $3 million in corporate SG&A I guess here in the fourth quarter, maybe can you score that with some of the implementation costs and perhaps other initiatives going on with your Clinical Information System and maybe just size it for us in relation to that number? Is that a good run rate or will we see that number creep up another $0.5 million a quarter? Just maybe frame that for us please.

Andrew Jeanneret

Sure. In terms of using the fourth quarter as perhaps a quarterly run rate, I would say you're probably sort of in the zone with that number. You'll see a little bit of an increase for the Clinical System, but not to the level that you were describing on a per quarter basis from an SG&A standpoint. As well as we stay on track with the rollout, which we are at this point, you'll have a slight increase due to that, but not the $500,000 a quarter you were talking about.

Darren Lehrich - Deutsche Bank

Okay. And so what are the implementation costs roughly that you anticipate in '09?

Andrew Jeanneret

We haven't broken that out. And we had that internally, but we haven't broken it out by quarter or by the '09 compared to what we had in '08 and what we actually... and actually in '10. And historically, we haven't given out that number and I'm not comfortable quite frankly, Darren, to break out what it is that we are going to expect specifically as it relates between '09 and what the ending is going to be in '10.

Darren Lehrich - Deutsche Bank

Okay. That's fair. And then if I could, I just want to make sure I heard you right that the fourth quarter cash flow from operations in the period was a little over $4 million if you did $11 million on the year. So can you just confirm that cash flow number for the fourth quarter? And then can you maybe just give us some timing around this change of ownership situation and when you expect that to resolve and get the DSO back from where it maybe creeps up in the first quarter?

Andrew Jeanneret

Sure. You're probably pretty close on fourth quarter operating cash flow calculation that you did. We saw some improvement in our DSO that actually came through obviously in the fourth quarter. So that was beneficial. When you talk about the DCA of Hyattsville and the change of ownership, it's really the financial intermediary; this one is a new one to us and sort of their internal processes. They typically tell you it can take anywhere from six to 12 weeks to process all the paperwork in order for you to get the CHOW finalized. Therefore, you can bill them and get paid.

As far as I know, it's still on track, but it's a new financial intermediary to us. And during 2008, if you remember, we had a new one added earlier in the year and we had an extended situation with them before we got our Medicare number so we could bill up. Right now, I don't see that situation with this new one, but it's our first time working with them. So, so far everything looks good, but I don't have a final approval yet.

Darren Lehrich - Deutsche Bank

Okay, that's helpful. And let me just maybe ask one more question for you Steve. You've in the past put out some pretty heavy growth targets. Obviously, you've set up a credit facility and you have access to capital, but we are in a different environment today, as you referenced in your prepared remarks. Can you just maybe give us a sense for what is a reasonable amount of growth given all the circumstances and maybe just in the context of what you put out there before?

Stephen Everett

Sure. I think there are a couple of comments that are probably warranted from that. The first is when you take a look at dividing up the pie of our growth between acquisitions and de novos, that could actually end up and may actually end up shifting somewhat more towards the de novo side depending on, first of all, where the costs are going to be associated with the acquisitions. We feel very fortunate with the revolving line that we have right now. We're not going to go and tap 100% of that towards acquisition. So we have to be somewhat more, if you will, careful about the deployment of that capital.

Overall, both the total number and what the battle plan is, if you will, remains unchanged. The timing can be affected by a couple of things. The good news is that, as I said in our prepared remarks, we continue to see both interest, excitement and a willingness of physicians who we are speaking with to both become involved with the dialysis business as well as to invest in the dialysis business.

So, now that being said, they then and we are seeing a little bit of this, are being challenged with, while they have the means to bring, whether it's 100,000, 200,000, whatever it may be to the table for an investment, the timing of that is somewhat challenging for us to be able to put our thumbs on. And that's mainly because these doctors are either... if they're going externally for financing or even at home, speaking with their families, trying to figure out do we go and take $200,000 and go invest in this business. It's a longer process. The relationship building is the same. Getting to the final point of the trigger does have the potential to be out there.

And again, just to reiterate, Darren, we are looking at when we are taking a look at growth, as you know, it's total patient census that we are interested in as opposed to number of facilities. That's one of the reasons we were excited about bringing Hyattsville on at the beginning of the year, the size of that facility.

And I think lastly, a last comment on that is taking a look at the markets that we are heading towards as far as growth. We are actually drilling down, I won't say more, but I'll say a little but differently than we have historically, taking a look... a harder look on where the economic pressures are in different demographic areas or different geographic areas rather. An example, Michigan has always been a market that we have been interested in establishment a footprint. Well, given what's going on in Detroit, we are less than excited about the potential of that market, at least in the near term, whereas there are other markets that we are actually more excited about as it relates to the current economy. So we've done, again, not deeper drilling, but a little bit of a different directional drilling.

At the end of the day, we expect our numbers to be again in line with what it is that we've been talking about.

Darren Lehrich - Deutsche Bank

Okay, great. Thanks a lot.

Stephen Everett

Thanks Darren.

Operator

Thank you. Our next question is from Nicholas Jansen of Raymond James. Your line is open.

Nicholas Jansen - Raymond James

Hey guys, just one quick question on your out-of-network utilization. Have you seen that trick down over '08? We were just a little surprised by the strong growth in revenue per treatment during the quarter and the year. It seemed like it accelerated over '07. So any thoughts on the out-of-network would be great. Thanks.

Andrew Jeanneret

Nick, this is Andrew. In terms of the out-of-network, we talked during 2008 that the trend is towards contracting. I would generally say that we see some of that, but not a significant shift. We look at this strategically. If we come across four, five patients we have in a certain region and we believe contracting will do better on a revenue per treatment for us than staying out of network, we'll take a look at that. There has been no wholesale changes in sort of our top four or five payors that are out-of-network, but the shift is moving slightly towards contracting.

Stephen Everett

Now, I'll add one more comment to that, and that is that the consensus actually, as far as number of patients we have that are commercial pay, obviously, that on a quarter-by-quarter basis can impacta slight uptick, if you will, in the overall commercial payor census which obviously pushes that number positively as well. And I want to reiterate that we are doing a slight shift, if you will, towards contracting. To the credit of Andrew's team, they have done I think an excellent job from a negotiating perspective with these payors that we are actually enjoying in network in the contracts that we have brought to the table that we are enjoying a little bit higher than expected reimbursement. So that pushes up a little bit as well.

Nicholas Jansen - Raymond James

Okay. And then lastly, one of your larger competitors talked about EPO utilization issue in the fourth quarter and a decline when most people are experiencing stabilization to slight gains. Any color on what you guys are seeing right now?

Stephen Everett

Well, we talked during 2008 about sort of the reestablishment of EPO not quite to historic highs, but we talked, if you look at quarter-by-quarter, our utilization has come up. And during the fourth quarter, I think that I won't say we plateaued, but we got closer to historical levels. I think the competitor you are talking about mentioned maybe the first quarter or second quarter, or maybe that's dipping back down slightly. That's a potential for us at the beginning of the year, but nothing significant.

Andrew Jeanneret

Okay. Thanks so much guys.

Stephen Everett

Very good.

Operator

Thank you. (Operator Instructions). I show no further questions or comments at this time, sir. Please proceed with any further remarks.

Stephen Everett

Well, very good. Again, thank you everyone for your interest in Dialysis Corporation of America. We are looking forward to a great 2009 and we appreciate your interest. Have a great day, have a great weekend.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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