Dialysis Corporation of America Q3 2009 Earnings Call Transcript

Dialysis Corporation of America (DCAI)

Q3 2009 Earnings Call Transcript

November 5, 2009 10:00 am ET

Executives

Steve Everett – President and CEO

Andrew Jeanneret – CFO

Analysts

Pito Chickering – Deutsche Bank

Ryan Austin [ph] - Wells Fargo

Presentation

Operator

Good day ladies and gentlemen, and thank you for standing by. Welcome to the Dialysis Corporation of America third quarter 2009 earnings call. (Operator instructions) I would now like to introduce your host for today’s conference, Mr. Andrew Jeanneret, CFO. Sir, please go ahead.

Andrew Jeanneret

Thank you, Karen, and welcome everyone to our third 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 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.

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

Steve Everett

Thank you. Good morning all. We will stick to our usual format today by first going through a few significant items for a quarter, including a business update. Andrew will take us through the financial results and then we will open up to your questions.

Our third-quarter results were announced yesterday, pretty much in line with our internal expectations. We did not experience any significant events or shifting trends in our daily operations during the quarter in our 35 dialysis centers currently in operation. They are all doing as expected both operationally and financially.

As you may recall, we consolidated units in a couple of our markets at the end of last quarter. The results of those moves have been very good in spite of the few patients we lost due to transportation and geography issues. Construction of our Kenwood, Ohio center is almost complete and subject to state surveying schedule, we should be open before the year-end.

Also our other current center being developed in partnership with the University of Cincinnati is on plan with construction underway. Obviously, it is treating the patients that entrust their dialysis needs to us that must be and is our primary focus and responsibility. One of the key measurements of quality care is dialysis adequacy. 97% of our patients have Kt/V greater than or equal to 1.2, which is the best in the industry.

Approximately 61% of our patients have fistulas in place and a continued focus by DCA’s clinical services folks, is steady demonstrable improvements is in their hands [ph]. Lastly, our hemoglobin is greater than 11 came in at 79%, a slight drop compared to the last quarter.

Our same-store treatment growth was right at 6% for the quarter compared to the same period last year, which is a nice rebound from the less than ideal 2% that we experienced last quarter. While we had no additional facilities to announce today, be assured that our business development activities are plentiful. That being said, our business model and courageous select acquisitions and de novo development.

In other words, we're only going to invest in markets and specific opportunities, where we are confident of solid returns on investments, where there are physician partners that aspire to the same high standards of care that all of our existing centers have.

Finally a couple of points on our 2011 bundle. First as you are no doubt aware, the comment period has been extended by 30 days, which we will take it out to December 16. We along with the most of the industry are continuing to try to get our arms around several key points of the bundle, and continue to provide CMS with comments on the draft of the rules. Three key items for DCA anyway come to the forefront.

The case mix adjusters are certainly one of them. We are continuing to be challenged with identifying exactly where our patients will fall and as the information that we have available is less than what CMS had in determining exactly how the breakdown would work.

Secondly, the part D side is very difficult to decipher, and we believe that it is under funded in the current draft. We will have to wait to see how that piece shapes out. And thirdly, the lab component could be a good thing for us as I have spoken to in the past or bad. We're not sure at this point just how much of the bundle is being directed to labs nor is the 20% co-pay the patients would now be responsible for was taken into consideration.

Assuming that these issues are addressed properly, we remain optimistic that the bundle will be good for DCA. With that I will turn the call back over to Andrew to discuss our financials.

Andrew Jeanneret

Thanks Steve. I would like to discuss our 2009 third quarter and nine-month results. Our operating revenue for the third quarter of 2009 was $25.1 million, a 14.9% increase over the $21.9 million in the third quarter of 2008. For the nine-month period operating revenue was $73.3 million, a 16% increase over the $63.2 million for 2008. Our total treatments were 75,985 for the 2009 quarter and 68,925 for the 2008 quarter, a 10.2% increase quarter-over-quarter.

For the nine-month period total treatments were 221,402 a 9.5% increase over the roughly 202,000 treatments for 2008. Average revenue per treatment was $326 per treatment for the third quarter of 2009 versus $313 per treatment for the third quarter of 2008, an increase of 4.2%. For the nine months we averaged $327 per treatment, a 6.2% increase over the $308 per treatment for 2008.

Our EPO revenue was about 32% of our medical services revenue in the third quarter of 2009 versus 29% of medical services revenue for the third quarter of 2008. For the nine months EPO revenue was about 31% of our medical services revenue for 2009, and 28% for 2008. Our EPO gross margin was up slightly in 2009 versus 2008 for all periods.

Net income attributable to DCA for the third quarter of 2009 was about $940,000 versus about $875,000 in the third quarter of 2008. For the nine-month period net income attributable to DCA was $1.8 million for 2009 versus about $2 million for 2008.

Diluted EPS was $0.10 for the third quarter of 2009 versus $0.09 for the third quarter of 2008. For the nine-month period, diluted EPS was $0.19 for 2009 versus $0.21 for 2008.

Several items are worth noting when comparing the year-over-year and quarter-over-quarter, which I have mentioned before. Corporate SG&A for the nine months of 2009 had about $325,000 of additional costs primarily driven by the nephrology medical research grant to the University as previously announced in the first quarter of ’09, and the second quarter of 2009 includes a little over $100,000 of one-time costs to merge two of our Virginia units together, as Steve previously mentioned.

Turning to major balance sheet items, cash operating activities provided almost $4 million of cash for 2009. We used about $1.6 million of our cash for normal or maintenance CapEx. We ended the third quarter with $3 million in cash. We paid down $500,000 on our credit line during the third quarter and ended up with about $8.8 million drawn on the $25 million line. Our DSO was 82 days at the end of the September versus 80 days at the end of June.

I will now turn the call back over to Steve.

Steve Everett

Very good. We all appreciate your interest in our company. And Karen at this time, we will turn over to any questions that there maybe.

Question-and-Answer Session

Operator

(Operator instructions) Our first question is from the line of Pito Chickering of Deutsche Bank.

Pito Chickering - Deutsche Bank

Hi, good morning guys. Pito in for Darren.

Steve Everett

Hi, Pito.

Andrew Jeanneret

Hi, Pito.

Pito Chickering - Deutsche Bank

Couple of quick questions here. The first one you talked about your IP system, can you give some examples of how that could provide increases going forward?

Steve Everett

Say it again, examples of what?

Pito Chickering - Deutsche Bank

So, with the new IP which is in place, I guess the question is from a productivity standpoint, you know sort of the (inaudible) -- the bottom line for your company.

Andrew Jeanneret

(inaudible).

Steve Everett

HHI is a clinical information system that we have that we are putting in place. And it has got a variety of things that will be happening on the billing front, where today we have been with the facilities that haven’t gone over yet, it is fairly manual. And on the clinical side, it has got a ton of information. Essentially it goes on to becoming an EMR number one, and number two, is in preparation for 2011, the amount of information that we are going to have to gather, prepare and then submit to CMS in order to get paid appropriately will be and is captured 100% on the HII.

It eliminates a tremendous amount of redundancy, Pito, on gathering and disseminating that information, while it is internal or out for billing purposes. I mean that is as far as I can go as far as quantifying efficiencies on it. But at the end of the day and of course (inaudible) will be affected by, we are going to need (inaudible). But as far as, if you are asking about FTEs or those types of things, it is hard for us at this point to get our arms around exactly how many staff members are going to be able to save. But we know that obviously it is going to be very positive.

Pito Chickering - Deutsche Bank

Okay, fair enough and then corporate G&A costs were down nicely sequentially. I guess, what made that reduction and is it at a good level, going forward?

Andrew Jeanneret

Peter, it is Andrew. I would say if you are looking for the next couple of quarters, we're probably going to be able to hire than where we ended in the third quarter on a quarterly run rate, but not by much.

Pito Chickering - Deutsche Bank

Thanks, but -- the decrease is…

Andrew Jeanneret

Can you repeat that Pito?

Pito Chickering - Deutsche Bank

So what lead to the quarterly decrease then? It will be a pretty nice drop sequentially. I guess why was there a drop there?

Andrew Jeanneret

There was nothing specific. We didn’t go and do any major changes from our staffing perspective at the corporate level. What we did is what we really talked about in the beginning of the year, and that is that we made our investments. We are now catching up to those investments. Some of them are beginning to pay off on the staffing side, on the hour side, but other than that, there is nothing. We have flat lined essentially as we would expect on the SG&A side as we have been talking about.

We are going to have upticks and downticks as we have certain line-items, where you may have an increase, whether it is on PTO, whether it is on benefits. Cost of consulting from the outside or one-time items. But there is nothing that we can point our finger to and say, well this is exactly why -- there is nothing material out there that points to why we had a sequential downtick on a quarter-over-quarter basis.

Again, I think that the best approach that I would suggest on that is think of this as for the most part anyway; you are not going to see any more increases, any substantial increases on a trend basis going forward. If anything, certainly as a percentage our SG&A should continue to come down as we have talked about as the economy continues to grow on the corporate side.

Pito Chickering - Deutsche Bank

Right. Cash flow from operations, what was that in the third quarter?

Andrew Jeanneret

About 4 million.

Pito Chickering - Deutsche Bank

Just two more quick questions here, DSOs were up a little bit, due to timing of payments?

Steve Everett

No particular reason. The only thing I sort of looked at, which was unusual given my timeframe on the DCA was in the summer of August, maybe people on vacation, but I didn't really see that happen last year. But there is nothing in particular, Pito, and in October I have already seen it come down a little bit.

Pito Chickering - Deutsche Bank

Okay, so there are no EDRs [ph] or anything along those lines, which floated down?

Steve Everett

No.

Pito Chickering - Deutsche Bank

Okay and then last question here. I guess looking at the quarterly incentives in the second quarter; you guys said it was 2100, and (inaudible) saying 2050 this quarter. So, it is a not a pull out of sequential growth. I guess, thinking about sort of growth going forward, (inaudible) again to reaccelerate here, kind of how should we be thinking of it?

Steve Everett

It goes -- there are two things to be keep in mind when we're talking about same-store. The first is we do get on any giving month and certainly any given quarter you are going to have up and downs that are just based on mortality, things that come into play. Secondly, we have got a fair number of patients that are skilled nursing facilities, and there is an ebb and flow that goes with that that again is very difficult for us. I think it is the impossible actually to go and try and put any type of timeframe as to when you are going to see upticks or downticks.

The average out over the year, and then lastly as you get into what we ended up doing in the last -- at the end of last quarter, and this isn't a large number, but we had a few patients that dropped off then we consolidated those facilities as we expected. But other than that, from a same-store perspective, we are actually happy with where we are at. We had a 6% jump on a year-over-year basis compared to last year. And I'm happy with that. And we are doing what we need to do on a same-store growth, from an operating perspective, from a development perspective.

And as long as we continue to operate in the SNF environment, and we plan to in selected areas in selective skill nursing facilities, you are going to see this type of ebb and flow of patients.

Andrew Jeanneret

And Pito, it is Andrew. Just to reiterate the points out. That is the count at the end of the month, the patients that were there in our units at the end of the month. I sort of look at treatment to see how those flow over the time period. So you get a snapshot of one day that we are comparing to.

Pito Chickering - Deutsche Bank

Okay, and then sort of last question, I guess coming back to the M&A, it has definitely been, as we have been talking about this for a while, I guess, is there any more details you can provide on number of people that you are maybe negotiating with right now or in contract with or any more…

Steve Everett

No, as you know Pito, we never have gone in -- the most color I can give -- give you on that this is the same as I -- as we have done in the past and that as we are in active discussions with several, less so on the acquisition front than we are on the de novo front. I addressed that last quarter. And we have taken a more conservative approach on that on the de novo front, the access to capital for our physicians or I should say the more conservative approach that physicians are taking to.

Opening up their wallets is having an effect from a timing perspective, but the pipeline is where we want it finally and we are optimistic that -- we are optimistic that we are going to get some -- in many of these deals done, what we can’t do, and what we are not willing to do is to put a time frame and put in a box for you. It just won’t be appropriate at this point.

Pito Chickering - Deutsche Bank

So then I guess if you look at some of the ones that may be falling by on the wayside, did they fall by because you know 50% of the doctors don’t want to spend [ph] some capital right now or do you lose them to other dialysis chains out there?

Steve Everett

Well, let me take the second piece of that. We have never lost a deal, to another dialysis chain that we wanted. We are taking a conservative approach, we’re not chasing deals. We won't chase deals. That has been our MO [ph] from the very beginning. So we have -- now to get back to the first we’ve had some deals that we’ve actually walked from a couple. Actually, I can only think it is two, right now that we’ve actually walked from because the needs of the physician and one of these cases is actually financial needs were in excess of what DCA was willing to put forth for the deal, and you could get into regulatory environment, you can also get into business environment, when you look at these things and we just weren’t comfortable going forward with these physicians.

And actually a little bit of that also gets down to the synergies from a cultural perspective that we would or would not have with these particular doctors. So we chose not to go forward on those. We've had a few deals. We have a few deals that the wallets if you will continue to exist, and that is it’s not a question of if, it’s not a question of a match, it's a question of how the physicians, it's more of a timing issue of how the physicians are going to come up with the capital, where they are going to get it from and then quite frankly in some cases it's getting their families to get on the same page that they are as it relates to this investment. And those are things that we can walk them through, but we can’t and we certainly choose not to push them through the process.

Pito Chickering - Deutsche Bank

Okay, and then last and then I will jump off, but I guess in looking at the doctor (inaudible). I believe you had discussed previously about some sort of physicians financing. Is that becoming more desirable from a doc point of view or is that still not enough to getting more people on it.

Steve Everett

I’m not (inaudible). We don't do as far as financing for physicians, if they can go to out to a third party to a bank and get whatever it is that they need to facilitate that's great, and the percentage even if they only have to come up with 20% if coming up with that 20% is sometimes challenging. All that being said, we are doing what we can, again being extremely conservative on our approach from a regulatory perspective in dealing with these physicians to assist them to get over whatever hurdles they are, if indeed it is a hurdle getting financing. Additionally, we are doing more today than we have in the past as far as third-party financing for leasing of equipment and potentially even leasing a TIs. Those are in place. So those are the hurdles that I am talking about with the physicians. They still, at the end of the day they got (inaudible) to get into a joint-venture, pure and simple.

Pito Chickering - Deutsche Bank

Great. Thanks a lot guys.

Steve Everett

Thank you.

Operator

Thank you sir. Our next question is from the line of Gary Lieberman of Wells Fargo.

Ryan Austin - Wells Fargo

Thank you. Good morning. This is Ryan Austin [ph] on for Gary.

Andrew Jeanneret

Hi, Ryan.

Steve Everett

Hello.

Ryan Austin - Wells Fargo

Hi. I was hoping you could speak a little bit more about the revenue per treatment. It looks like -- it's a little bit of a decline sequentially, and I was just looking for a little bit more color on maybe what causes the decline.

Andrew Jeanneret

Hi Ryan, it’s Andrew. I think it's down like a dollar or something from the last quarter. It’s really sort of insignificant. You know the things that drive that or just changes in payer mix. Nothing significant, no trend one way or the other, just one quarter versus the other, just you know some small changes.

Ryan Austin - Wells Fargo

Okay, I mean I see that your EPO revenue increased. So I assume then it’s purely contracting or purely just -- I mean is there anything you can --

Steve Everett

There’s nothing -- there is nothing new that is out there. We continue -- as it relates to contracting our -- as you can imagine our I sense this on a commercial size will shift. One day we may have the patient where we’re being paid quite handsomely on the commercial side, and the next day we may lose that patient, get one of the state pays for or vice versa.

So that -- there's nothing from a training perspective, there’s nothing really to speak of as it relates to that. The other side that impacts your revenue per treatments certainly is the drug side. Our physicians prescribing the drugs are done based on a patient needs, and you are going to see that type of an uplift and down as we bring on more new patients. Typically we see a little bit of a jump, certainly on the EPO side or they were to get a patient stabilize.

You could see a little bit more of that typically in a SNF environment, which t is not atypical at all. Where you could have a next quarter where you've got a more stable patient base and those numbers can come down, as Andrew just said there's nothing specific that speaks to any increase or decrease over time here relating to revenue per treatment. We have no new big contract that have come or gone and we're not seeing -- we have seen over the last year the trending up as most have back to normalcy, if you will EPO prescriptions, but that has leveled out and has been for some time now.

Andrew Jeanneret

The only thing anything I would add I guess is, you know, some of our other dialysis companies as you hear talk about through the general economic conditions, there was very vast potential backdrop out there, but we're not concentrated in an industrial area, where you see an industry all of a sudden you know, do poorly (inaudible) and they have massive loss, and people don’t (inaudible). But again, I think maybe in this last quarter there might have been one patient that I am aware of that couldn’t elect COBRA, and how to get Medicare. So not a big number.

Ryan Austin - Wells Fargo

Okay, thank you for that. Just talking about the two new centers in Ohio, you mentioned in your press release that you are subject to the state licensing timing. Maybe you could just add a little more detail about, what would, are there sort of, is there a risk that, there is a slope that could push that fourth-quarter rollout?

Steve Everett

No, you know, yes, the short answer is sure. It could push it out. We're talking about the state of Ohio. We have experiences in the state of Ohio. We are not talking about Texas. There is not a backlog there. That being said, Ohio, I think in all the states that we're out right now; probably Pennsylvania is our quickest turnaround state for whatever reason. (inaudible) we happen to have facilities in there, and as we continue to develop in Pennsylvania our turnaround in the state is faster.

New Jersey is probably the slowest for us. Ohio we know the routine, we know the drill. What it takes to get the process completed, but we're certainly at their beck and call. At the end of the day, we notified them that we are ready. We put a couple of patients on. We notified the state that we are ready for inspection, and then we treat those patients and wait for a knock at the door.

That knock on the door has not been 6 months out in the state of Ohio. It has been fairly expeditious, but again I would caution to say that tomorrow could be a different day. Certainly, I don’t think that you would seen the number of facilities built in the state of Texas over the last two years, had companies known that there were going to have that type of a contrary to wait, but we don't see that in Ohio.

Ryan Austin - Wells Fargo

Okay great, and lastly just turning to the bundle. I was wondering if you could comment. Do you, would you say there is -- when you look at the adjusters there is any particular adjusters that skewed you more towards?

Andrew Jeanneret

You know, I would probably say no. I mean the one adjuster that is not there that I think has been talked about is probably more predictive of our cost is rates, and currently that is not one that CMS included.

Ryan Austin - Wells Fargo

Right. Well, how about, I guess more obviously the low-volume adjuster?

Andrew Jeanneret

That doesn't impact us.

Ryan Austin - Wells Fargo

Okay. And then as far as the lab services, you said that that would be a benefit. How can you, sort of just how can we understand that. I mean it is just a pure reimbursement benefit for something you currently don’t offer or is it something that you would sort of look to get into more of down the road?

Steve Everett

We were forced to get into it under the bundle, into it by virtue of contracting with a third party. At this point, DCA has no interest. We are not exploring and we have no thought as to getting into directly into the lab business. It is not something that is near our radar screen. However, under the assumption that the reimbursement, the portion of the bundle is at least somewhat decent on the lab side, we believe that we can benefit out of it.

And it is simple math. There are a small handful of lab providers out there. We know them all, and we like to work with one of them. Currently, we have got three labs primarily that we're utilizing in our company. We don't have any single lab contract today. But at the end of the day, to pick a number, let us say it is eight dollars is the reimbursement that CMS is providing for lab. If we can go on in and get an all in rate at something less than that on a contractual basis, and shift the risk over to a lab that is an automatic win for DCA.

If it is coming down to six dollars, we will end up profiting on two dollars of treatment. As I said there are -- there is a small handful of labs and they all provide very good service, and we're actually testing a couple of labs that we haven't used in the past to make sure that the quality level, service quality is on par with the others. It gets down to at the end of the day if we have the same level of service, the quality is the same, then it is going to get down to pure dollars and cents, and he who comes in lowest with us will win, and we're hoping that our lowest is something below what we are paying.

Ryan Austin - Wells Fargo

Okay that is helpful. That is all my questions. Thanks.

Andrew Jeanneret

Very good.

Operator

Thank you sir. (Operator instructions) And I see no further questions in queue at the moment.

Andrew Jeanneret

Okay, well, very good. Thank you Karen. Thank you everyone for your interest and your time this morning. We look forward to talking to you at the end of the year. Have a great afternoon.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone have a good afternoon.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!