Dialysis Corp. of America Q2 2009 Earnings Call Transcript

Dialysis Corp. of America (DCAI)

Q2 2009 Earnings Call

August 6, 2009 10:00 am ET

Executives

Stephen W. Everett - President, Chief Executive Officer, Director

Andrew J. Jeanneret - Chief Financial Officer, Vice President - Finance

Analysts

Gary Lieberman - Wells Fargo Securities, Llc

Presentation

Operator

Good morning ladies and gentlemen my name is Howard and I will be your conference operator today. At this time I would like to welcome everyone to the Dialysis Corporation of America Second Quarter 2009 Earnings Conference Call (Operator Instructions). I would now like to introduce your host for today’s presentation Mr. Andrew Jeanneret, Chief Financial Officer.

Andrew Jeanneret

Thank you, Howard and welcome everyone to our second quarter 2009 conference call. My name is Andrew Jeanneret, and with me is Steve Everett, our CEO.

I would like to start the call with our standard forward-looking statement disclosure. During this 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 including 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.

With that said I will now turn the call over to Steve Everett.

Steve Everett

Thank you Andrew and good morning everyone. As we have done in the past I would like to begin by going over some key data from the quarter as well as an overall business update. We will follow that with Andrew reviewing our financial results and then open up for any questions that you may have.

As you know, we announced our results for the second quarter of 2009 last evening. Let me start with a few operating points worth noting. We began the quarter with 37 dialysis centers in operation serving nearly 2000 patients. During the quarter we consolidated two of our facilities into one. In July, subsequent to the quarters end, we did the same thing with two other centers bringing our total number of centers to 35. In both cases we were able to significantly improve operating efficiencies without losing many patients from our system. Between both of the areas that were consolidated only about five patients transferred out of our system, and we ended the quarter with a total of nearly 2,100 patients.

The two centers that we have in development in partnership with the University of Cincinnati are on schedule with the first one expected to open sometime in early Q4. It is worth noting that for the first time in years we are experiencing a reduction in the overall construction costs for new facilities; that changed about $5.00 a foot.

Our acute program remains unchanged with treatments being delivered in 11 hospitals in the areas that we serve.

Next, our company’s persistent focus on quality care continues to pay off with dialysis adequacy or our KT over Vs greater than or equal to 1.2 have increased to 98% the highest in the industry that we are aware of. Our hemoglobins’ greater than 11 remain constant at 81 and our vascular access management continues to improve with about 60% of our patients now having fistulas in place.

The Company’s growth strategies remain unchanged with a combination of focused same store growth and adding new centers primarily through joint venture start-ups. As you may have seen our same store treatment growth is showing only about 2% year-over-year change for the first six months, but the combining of one of our older centers with the newer centers I mentioned earlier, caused that percentage change to be artificially low. Without that the one less operating day this year we would have been substantially higher. It is also worth noting that DCA when we calculate our same store growth we do not take into consideration De nova’s or our start-up facilities, we actually exclude those and again that is part of the reason that we had the artificially low numbers.

As I mentioned last quarter the current economic conditions have made it a lengthier process to bring new business deals to the finish line, although the number of deals we are working on is very solid. Our development team has expanded the footprint of the Company to include six additional states and we are now active in all of them.

Finally, a quick update on the legislative front, although there is not a ton to report. In regards to the upcoming bundle we expect to see a draft of the rules of the plan sometime this month. Risk adjusters, role market payments, and the like will no doubt be key drivers during the comment period which could last several months.

There is nothing to report on any extension on the MSB. While we remain of the strong opinion that an extension makes sense for patients, for providers, and for the taxpayers, we haven’t seen or heard anything new on the subject.

On that note I will now turn the call back over to Andrew.

Andrew Jeanneret

Thanks Steve. I would like to discuss our 2009 second quarter and six-month results. Our operating revenue for the second quarter of 2009 was $24.7 million, an 18.6% increase over the $20.8 million in the second quarter of 2008. For the six-month period operating revenue was $48.2 million, a 16.6% increase over the $41.3 million for 2008. Our total treatments were 73,927 for the 2009 quarter and 68,021 for the 2008 quarter, an 8.7% increase quarter-over-quarter.

r the six-month period total treatments were 145,417 a 9.1% increase over the 133,342 for 2008. Average revenue per treatment was $331.00 per treatment for the second quarter of 2009 versus $302.00 a treatment for the second quarter of 2008, an increase of 9.7%. For the six months we averaged $328.00 per treatment, a 7.3% increase over the $305.00 per treatment for 2008.

Our EPO revenue was about 31% of our medical services revenue in the second quarter of 2009 versus 27% of the medical services revenue for the second quarter of 2008. For the six months EPO revenue was about 30% of our medical services revenue for 2009 and 27% for 2008. Our EPO gross margin was up slightly in 2009 versus 2008 for all periods.

Net income attributable to the DCA for the second quarter of 2009 was about $709,000 versus about $663,000 in the second quarter of 2008. For the six-month period net income attributable to DCA was $888,000 for 2009 versus about $1.1 million for 2008.

Diluted EPS was $0.07 for the second quarter of 2009 versus $0.07 for the second quarter of 2008. For the six-month period diluted EPS was $0.09 for 2009 versus $0.12 for 2008.

Several items are worth noting when comparing the year-over-year and quarter-over-quarter. Corporate SG&A for the six months of 2009 had about $325,000 of additional costs primarily driven by the nephrology medical research grant to the University of Cincinnati as we previously talked about last call. In the second quarter of 2009 we have $100,000.00 of 1-x costs to merge two of our Virginia units together as Steve previously mentioned.

Turning to major balance sheet items, cash operating activities provided $4.8 million of cash for 2009. We used about $1 million of our cash for normal or maintenance CapEx which is sort of consistent with our run rate. We ended the second quarter with $5.4 million in cash. We paid down $1 million on our credit line and ended with about $9.3 million drawn on our $25 million line.

Our DSO went down three days from the first quarter of 2009 quarter end to 80 days. During the second quarter we went live with our new billing system that integrates with the clinical system we are installing. All units are live on the billing system, while we are still progressing with our clinical roll out a little ahead of schedule.

I will now turn the call back over to Steve.

Steve Everett

That is all we have for our prepared remarks. If there are any questions we will be more than happy to take them at this point.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Gary Lieberman of Wells Fargo Securities, Llc.

Gary Lieberman - Wells Fargo Securities, Llc

I was hoping you could talk about your contract mix. Are you seeing fewer or more out of network contracts? Are you trying to go to more of a bundled methodology with some of the commercial players? I would like to know sort of where you are there.

Steve Everett

Okay there are two pieces to that. First of all as it relates to if we are going more toward contracting as opposed to out of network, I would say that our philosophy is certainly unchanged and I think our results bear that out. We continue to take a look on a month-by-month and quarter-by-quarter basis on all of our out of network patients to see whether or not it makes economic sense for us to contemplate going into contract negotiations with these different payers. I don’t know that we’ve had any changes dramatically.

Andrew Jeanneret

Gary, there are no large shifts or even small shifts to report either contracting or non-contracting.

Steve Everett

So, Gary we remain where we were which was we are looking at it more intently than we ever have, and that has been ongoing for the past nine months, to see whether or not it makes more sense. We are more in network than we have been in the past, but there are no significant shifts from quarter-over-quarter certainly.

As to going to more of a bundled approach, with the peers that we have and where we are in network with we have somewhere we have bundled product already. We are certainly not pushing that. It is really starting from there end. We have a few, we have several actually that are all in, but no change. We are not pushing that, having anything to do with it, especially as it relates to preparing for a bundle through CMS in ’11.

Gary Lieberman - Wells Fargo Securities, Llc

Okay and can you just remind us what percent of the commercial contracts are in network versus out of network?

Steve Everett

It is right about down the middle right now I believe.

Andrew Jeanneret

It varies on the commercial patients that we have, anywhere in the 40% to 60% range and it just depends, but that is the same historical mix over the last about 18 months.

Gary Lieberman - Wells Fargo Securities, Llc

Okay and then I guess in thinking about moving towards, at least, a bundled rate from Medicare, if I remember correctly providers have the option of either going in 100% to the bundled rate with CMS in 2011 or phasing it in over a few years. How do you guys think you would approach it?

Steve Everett

That is a great question. First of all we are not sure exactly what the bundle is going to have. We are expecting, as I had mentioned earlier, this month to have the latest and greatest as to the rules from CMS. Our plan, if it goes according to what we expect it to be, would be to go all in, in the beginning. The logic behind that is first of all we believe that there is some significant upside as it relates to laboratory. DCA does not have a lab. We will therefore be contracting under the assumption that the lab is in, we will be contracting for laboratory services and we believe that we will be able to participate in some of the income that is generated from that through laboratory contracts or a contract. Beyond there it will be very interesting to see exactly what is going to be included in and what they are going to be doing for outliers, etcetera. But, at this point we are betting on and fully expect that we are going to want to go all in, but we will wait and see.

Gary Lieberman - Wells Fargo Securities, Llc

Okay and then maybe you could give us an update on Heparin. I guess a couple of providers have said that there was another price increase at the end of June of about 30%. Can you talk to us about maybe where Heparin is sort of on a cost per treatment basis and what you guys have tried to do or been able to do to mitigate the increase in the price?

Andrew Jeanneret

We had that same 30% increase effective on July1 for us. If you recall, in 2008 Heparin doubled twice and now in 2009 halfway through you see a 30% increase coming. Like some of the other LDOs that are out there talking about looking at other alternatives, we are looking at that also. Some of the solutions don’t necessarily meet every patients need though; so we are evaluating that and we will look at sort of a quality trade off with our patients versus the costs.

Gary Lieberman - Wells Fargo Securities, Llc

Okay and where are you on a cost per treatment basis for Heparin, just to give us some perspective?

Andrew Jeanneret

We haven’t disclosed that in the past. Obviously back in 2008 when this first started it was much smaller. It wasn’t a huge part of our business at the beginning of the year last year.

Gary Lieberman - Wells Fargo Securities, Llc

Okay on the EPO front, where are you in terms of EPO utilization? We saw a decrease through ’07 and ’08. Where are you in terms of EPO use now? Has it normalized or come back at all?

Andrew Jeanneret

Yes, EPO is back where we expect it. As I am sure you all saw, our revenue per treatment has gone up substantially from both the half-year and the quarters over last year. A significant component of that is on EPO coming back to normal levels. We are in the mid eighths right now as far as what we experienced in the last quarter. It should be noted that we have a significant number of skilled nursing facility, or nursing home patients, that are in our mix which actually can skew those numbers beyond where the norm would be, as we would expect.

But, yes we are now tracking where we would have expected to kind of, if you will, but the pre ’07, ’08 issues that were sitting out there on Epigone, but we believe that we are back to kind of a normal track.

Gary Lieberman - Wells Fargo Securities, Llc

Okay and then can you give us an update on the acquisition front? What does it look like out there? Have prices come down at all, or just where are we as compared to years past?

Steve Everett

We, again Gary as you know, we are not focused on acquisitions we are more focused on De novas. That being said, we have this year put our name in the hat in several opportunities that were out there for acquisitions. When DaVita, or Fresenius are anxious to get a particular business we are not going to effectively want to won out and compete with them. The multiples are just going to get beyond where it is that we would be interested in. What we are seeing overall is, as others have stated, we are not seeing any reduction, any slow down in pricing as it relates to acquisitions regardless of size. I don’t know how else I can put it other than it is strong, it was strong, and it seems to be remaining strong. We don’t see any indicators of anything going south at this point.

Gary Lieberman - Wells Fargo Securities, Llc

Okay great. Thanks a lot.

Steve Everett

If there are no other questions then we appreciate everyone’s time today and we look forward to speaking to you next quarter. Thanks.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation. (Operator Instructions)

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