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Executives

Andrew Jeanneret – CFO

Steve Everett – President and CEO

Analysts

Ryan Halsted – Wells Fargo

Darren Lehrich – Deutsche Bank

Dialysis Corporation of America (DCAI) Q4 2009 Earnings Call March 11, 2010 10:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Dialysis Corporation of America fiscal year-end 2009 earnings conference call. At this time, all participants are in a listen-only mode. Later will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today’s conference, Mr. Andrew Jeanneret, CFO. Sir, you may begin.

Andrew Jeanneret

Thank you, operator, and welcome everyone to our 2009 fourth quarter conference call. My name is Andrew Jeanneret. With me is Steve Everett.

I will start the call with our 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 fact.

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 reports 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 developments.

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

Steve Everett

Thanks Andrew. Good morning everyone. As you know, we announced our results for the fourth quarter and the full year of 2009 yesterday. As with prior calls, I would like to spend a few minutes providing you with the business update before Andrew covers the financial results. And then, we will be happy to take any questions that you may have.

First, a few operating notes. As you know, we consolidated four of our centers last year to two centers, resulting in improved aggregate margins at those facilities as well as operating efficiencies. During the year, we also built two new centers in Ohio, which are currently in the process of being certified by Medicare.

We provided a little bit more than 296,000 dialysis treatments for the year, which is a slightly lower number than we expected for our same-store growth which was about 2%. We also began our first university affiliation in 2009, which was with the School of Medicine at the University of Cincinnati. The affiliation included a grant agreement that will span over three years with the DCA contribution of $265,000 in each of those years, the first which was provided last March.

Beyond the financial support we are providing, it’s our hope for DCA facility participation in various research studies being conducted by the university in the hopes of improving the lives of the patients afflicted with kidney disease.

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 the measurement of adequacy of dialysis remained at slightly above 97%, a statistic that we are very proud of.

Our anemia management for the year resulted in hemoglobins greater than 11 to be roughly 80%, a slight downward tick primarily due to an increase in the nursing home patients in our system. These patients typically have more comorbidities and can be more challenging to obtain the ideal hemoglobin levels. Our final clinical measurement is access management, which continues to improve with 60% of our patients having fistulas [ph] in place at the end of the year.

Our new business development was rather stagnant over the year with two new centers being developed as I already mentioned and the integration of our Hyattsville center into our system.

We sat on the sidelines regarding acquisitions and found many physicians wanting to sit on the sidelines this past year in regards to de novo joint ventures, driven primarily by a desire to see how the impact of the bundle of 2011 is going to affect them, which we should be able to address better later in 2010, as well as their continued concerns over the economy as a whole.

While I am reluctant to predict the timing of these opportunities that are out there coming to fruition, we do feel confident that the effects of the 2011 bundle becomes clearer and personal financial fears begin to subside, we should be able to get these opportunities to the finish line.

Finally, it would be a mistake not to make note of our take on the upcoming bundle. The key issues that in our opinion that will ultimately determine the impact on DCA or any other provider for that matter are where our oral medications will end up, what comorbidities will be used in determining reimbursement, and lab testing. We will have a better feel for everything as the year progresses. At this point, there is really nothing new to report.

The fact that we have completed our phase-in of our new clinical information system, which is a huge deal for us was critical for DCA as we prepare for the bundle to say nothing of making life easier on our physicians and our caregivers.

With that, I will turn the call over to Andrew to discuss the financials.

Andrew Jeanneret

Thanks, Steve. I would like to discuss our 2009 fourth quarter and annual results. Our operating revenue for the fourth quarter of 2009 was $25.6 million, an 8% increase over the $23.7 million in the fourth quarter of 2008. For the year, operating revenue was $98.9 million, a 14% increase over the $86.8 million for 2008.

Our total treatments were 74,680 for the 2009 quarter and 70,276 for the 2008 quarter, a 6% increase quarter-over-quarter. For the year, total treatments were about 296,000, an almost 9% increase over the 272,000 for 2008.

Average revenue per treatment was $341 per treatment for the fourth quarter of 2009 versus $333 per treatment for the fourth quarter of 2008. For the year, we averaged $331 per treatment, a 5% increase over the $314 per treatment for 2008.

Our operating income was $2.3 million in the fourth quarter of 2009 versus $2.2 million in the fourth quarter of 2008, a 3% increase. For the year, operating income was $6.8 million for 2009 versus $6.2 million for 2008, a 9% increase.

Net income for the company for the fourth quarter 2009 was $1 million versus about $0.9 million in the fourth quarter of 2008. For 2009, net income was $2.9 million versus about $2.8 million for 2008 year.

A few of our joint venture facilities with larger non-controlling interest ownership had better results in 2009 than 2008, which means more non-controlling interest expense to DCA. This lowered net income in the fourth quarter by about a $100,000 and the entire 2009 year by about $400,000 when compared with the same 2008 periods.

Diluted EPS was $0.11 for the fourth quarter of 2009 versus $0.09 for the fourth quarter of 2008, and $0.30 for both 2008 and 2009.

Cash operating activities provided $7.7 million of cash for the 2009 year. We used about $2.5 million of our cash for normal or maintenance CapEx and about $1 million for de novo construction. We ended the year with $3.2 million in cash and a little over $7 million in debt drawn on our credit line of $25 million.

Our DSO was 78 days at the end of December, down from 82 days at the end of September 2009.

I will now turn the call back over to Steve.

Steve Everett

Thank you. As a final note, I would like to extend our appreciation to all the fantastic caregivers that are part of our team and provide superb quality care to the patients that we are responsible for.

Additionally, we are extremely grateful for our shareholders faith in our company and we promise to continue working to maximize the value of every dollar that you have invested in DCA.

With that, it concludes our formal remarks, and we will be glad to take any questions that you may have. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Gary Lieberman of Wells Fargo.

Ryan Halsted – Wells Fargo

Thank you. Good morning, this is Ryan Halsted in for Gary.

Steve Everett

Hi Ryan.

Andrew Jeanneret

Hi Ryan.

Ryan Halsted – Wells Fargo

How are you? Did I miss the – your percent of EPO revenue or did you give EPO revenue as a percent of your medical services?

Andrew Jeanneret

No. For 2009, our EPO as a percent of our medical services revenue was about 30%. It was about 27% in 2008.

Ryan Halsted – Wells Fargo

Okay. And, I mean any commentary on if that contributed to what looked like a pretty strong revenue per treatment in the quarter?

Andrew Jeanneret

For the entire year, it has a positive impact versus 2008, yes.

Ryan Halsted – Wells Fargo

Okay. Could you also – could you give us an update on the Ohio centers? I know you mentioned they are still in the certification process. I thought it was expected maybe they would be underway this quarter. But is there any update on that?

Steve Everett

Yes. We remained hopeful they will be underway this quarter, I mean we were driving to the end.

Our first facility there in Kenwood is actually up and open and we are waiting for the state to come in. We are actually treating two patients right now. And we should have that certified within the next three weeks based on what the states – their timeframes that they have given us, that’s the outside. So it is possible, they are in there right now, which will be wonderful.

As it relates to Eastgate, we have our certificate of occupancies there and we are putting the final touches in getting prepared to put on our first two patients there momentarily. So we are at the finish line with one and at the final 100 yard dash for the other.

Ryan Halsted – Wells Fargo

Great. As far as in your prepared remarks, you mentioned that the business development side has been a little stagnant so far. And I think in the past, you have mentioned, capital constraints has been one of the issues in addition to the bundle. Is that an issue anymore or has the capital side of it been resolved and it’s just the impact of the bundle that people are kind of waiting on?

Steve Everett

Yes, we – capital constraints is nothing that I have ever mentioned before as it relates to DCA. Now, when we do de novo – from an acquisition perspective, we are in great shape. It’s a simple matter of the opportunities being there that we believe are good for us and that the pricing is right and they are synergistic with DCA. That’s really what has driven, if you will, the DCA’s sideline activity in regards to that.

On the other hand with de novo startup facilities, it’s – that may be where you were coming up with the capital issue and it’s not us, it’s actually physicians. As you know, our preference is to enter into joint venture relationships. What we have found over the last year and a half, certainly the last 12 months is that the docs have been a little bit more leery to grabbing their wallet and in participating financially.

They have let us know that they will take a one or two ways either sit on the sidelines themselves wait until they, their spouse, their family, altogether are more comfortable with the overall economy at which time they would like to invest or coming in as a non-equity owner which is not our preferred model. So that’s been the big – one of the two big drivers with the physicians reluctances. Now that doesn’t mean that there aren’t opportunities out there, it’s just a much slower train if you will than we have experienced in the past.

Secondly is the bundle and again this is on the physician side. They are concerned about what is the ultimate effect of the bundle going to be on my dialysis center. And we obviously cannot give them total clarity on that, so there has been some reluctance to, if you will bite the bullet until that clarity is there. We expect that that clarity will be coming obviously this year. And for that reason, we are continuing to work with these docs, and as we wait for that clarity with the hope that we will all be able to easily pull the trigger on these opportunities once that happens.

Ryan Halsted – Wells Fargo

Okay, great. And as far as the bundle as it concerns DCAI, you have mentioned that you expected to transition fully, is that still your stance?

Steve Everett

It gets – it is our stance barring no new information at this point. We have no reason – there is nothing that would preclude us from wanting to do that. We still remain – again caveat those three items that I had mentioned to you are of great concern and mainly because we don’t know. But if we jump to the conclusion that they will – that the results that we are going to get and the final ruling is going to be favorable, then yes, absolutely we will be jumping with both feet.

At the same time, the labs, which I had mentioned to you, is a big question, we are already in the process. We have invited a one new laboratory into DCA to start providing services to our patients and we are already in the process of doing our valuations of those labs which again as I have mentioned in previous calls, we expect to have potential uptick for us on a bottom line as we participate in income from laboratory services that we have not been able to historically.

Ryan Halsted – Wells Fargo

Okay, great. And then as far as your contract mix, can you give us an update on where you currently are there if it’s still somewhat evenly split between in network and out of networks?

Andrew Jeanneret

Yes, Ryan, this is Andrew. We are seeing since 2009 probably the same message I have said before more of the shifting towards folks wanting to be contracted versus non-contracting. And we look at those selectively when it makes sense and we have the patients – we will look at doing that. We still don’t have any national contracts with sort of the big providers that are out there. But in my view, I see that in the future being something that we will look at more strongly that we have in the past.

Steve Everett

One thing – and let me jump on one additional item of that something that we are seeing a little bit out there. There is actually one payer right now that we are having some conversations with about potentially getting into a national contract with. And historically, I have not been one to believe that we are going to be able to see a shifting of the patients or I should see any incremental patient flow into DCA.

This actually is a little bit of an accession to that, because we are still – we do believe that the pressure that has currently been placed on discharge planters as an example from these payers to push patients into our facility is greater than it has been historically. And this particular provider – by way of example, this particular provider, we have done an analysis that we know that right now we are actually on the cusp of – if we were to take a haircut, a decent haircut on reimbursement that would take a thin network on it that we believe that we would make up and this is all preliminary, but it looks very favorable, but we would make up that the necessary patient census to bring in the – the bottom line delta back to where it was in short order, potentially less than 12 months. That’s very appealing, which is something that we haven’t – I haven’t really seen in the past. And again we are not signing on any dotted lines today, but it is something that we are evaluating. That could potentially have a little bit more significance to us in the future.

Ryan Halsted – Wells Fargo

Okay, great, thanks. I will step back now.

Operator

Thank you. (Operator Instructions). Our next question comes from Darren Lehrich of Deutsche Bank.

Darren Lehrich – Deutsche Bank

Thanks. Good morning, everybody. How are you doing?

Steve Everett

Hi Darren.

Darren Lehrich – Deutsche Bank

Couple of things; I did want to just follow up on the development question. Are there any changes that you anticipate or maybe making in terms of infrastructure or personnel on the development side? I sensed in your prepared remarks a bit of frustration and maybe it’s the environment. But perhaps maybe there is something in terms of how you are set up too. Is there anything you want to update us there on it please?

Steve Everett

Yes, the frustration, if you sense that, is purely – and I am sure that there are others on this call that that would share this and that’s the level of patients that I have and have always had to get from the starting line to the finish line. A lot of that, Darren, is quite frankly for the deals that we are interested in and the markets that we are interested in are areas that were just not – not in our – not in our control.

Now that being said, we are anxiously looking to bring on board – talking about the infrastructure, we are looking for, if you will, a CDO, a Chief Development Officer with a background that’s a little bit different than what it is that we have had historically, and that – I am going to wait as long as it takes.

Rolodexes are always wonderful, but what I really need is someone that is going to be able to take our deals specifically on the de novo side, we have a plenty from a pipeline perspective. It’s getting these – it’s educating these physicians, if you will, potentially more effectively than we have in the past about where the final outcome of their financial investment will be in the dialysis industry. So we are looking very, very closely at that.

On the acquisition front, quite frankly, I look at acquisitions and I think I speak for my entire management team as a much easier nut and say, it’s – if there are synergies, if there are culture synergies and business synergies and the pricing is right, we pull the trigger and it becomes a very easy transaction to bring to conclusion for something that we want, so that – that’s less challenging.

But on the de novo side, yes, absolutely we are in the process of trying to bring on board a different type of account [ph] that we have had in the past, but we are not going to rush to that either.

Darren Lehrich – Deutsche Bank

Okay, that’s helpful. I think Ryan asked you about your commercial and out of network and maybe I will just ask it a little bit differently. What was your spot commercial mix either for the year or for the quarter? And can you just indicate whether your commercial revenue mix has come down just given the unemployment situation?

Andrew Jeanneret

Hi, Darren, it’s Andrew. On the mix, we sort of closed for the commercial patients that we have. It’s somewhere between 50%, sometimes 40-60. Meaning, the 40 is out of network. I would say it’s closer to that. And as I have said in ’09, we are seeing a little bit of the shift, so that it’s probably going to go lower, so there will be less out of network in 2010.

Steve Everett

And as to – what was the second part of your question?

Darren Lehrich – Deutsche Bank

Yes, so that’s helpful. And then in terms of just the revenue mix that’s commercial for you as a percentage of total.

Andrew Jeanneret

Yes. And so, in the next few days, we will just file our 10-K and you will see those that data in there. It’s fairly consistent with the third quarter and it’s up over 2008.

Darren Lehrich – Deutsche Bank

Okay, that’s great. And then, I guess I just had a question about the VA in the federal register last month, there was this proposal here for a reduction. And I am just wondering if you can maybe spell out for us what the impact is to DCA or perhaps just size your VA business and whether you think that’s something we should be thinking that for 2010?

Steve Everett

Yes. The – if you know, the process right now, we are very active in participating with KCC on that, the Kidney Care Council on that very subject. We are not sure exactly what the timing is that whatever that rate reduction is going to take place.

But I will tell you two numbers that actually I was asked yesterday and that is total patients what is that number as it relates to DCA percentage wise. And we are below that 2%, we are definitely below the 2% impact. In other words, much fewer than 2% of our patients (inaudible) willing or able to get quite frankly at this point will be impacted.

And the number that is sitting out as far as a reduction in reimbursement on the flipside, if you are the government, what they are saying that they believe they are going to save about 39% of their costs, that number is actually a little higher for DCA.

So I don’t know what other clarity I can give you on that until we find out if it’s going to be down, if Medicare is going to be something above that and we are in the comment period right now.

Darren Lehrich – Deutsche Bank

Sure. No, that’s helpful. We know that 39% number. But – and it would be higher – slightly higher for you because…

Andrew Jeanneret

Because our rates currently with our VA patient mix are probably better than the national average.

Darren Lehrich – Deutsche Bank

Okay, sure. Okay. And the clinical system and it sounds like your – you made a lot of progress in that. Maybe just update us in general please on sort of where you are in your process and what you are seeing out of that system from just a either a savings or productivity standpoint and anything there?

Steve Everett

Well the – first of all, the end is where we are, it’s we are out. We have gone system wide, where we pushed it because of the – we actually ended up a quarter ahead than our original plan and it cost us a little bit to do that in the first quarter or the last – or I should say in the last months to two months.

The reasons for that pushing were several things, but two significant pieces of it were that the data that we are able to capture and we believe that there is definitely some revenue that we maybe missing and it was a push on my – from me to get that out there and be done with it.

As to what the actual dollars are going to be from any type of revenue enhancements, absolutely, I cannot provide any clarity on that, because the reality is, is that the trigger on it is the ultimate trigger which is getting it system wide just finished, just occurred. So time, 2010 will tell that.

We – on the cost side, we will be reducing through this quarter the dollar for dollar cost that are being put in, that have been spent and human capital will start to come down and will level out somewhere in the second quarter, certainly by the end of the second quarter down to what our future run rate will be.

Darren Lehrich – Deutsche Bank

Okay, and just on that comment, your corporate SG&A did come down quite a bit sequentially, so I don’t know if there was anything, Andrew, that you wanted to update us on there, was there any kind of reallocation between facility and corporate? But I thought we had been run rating more closer to the $12 million type of number and now that number has come down some with the fourth quarter looking what $2.4 million or so.

Andrew Jeanneret

It’s – Darren, if you are just looking at the corporate SG&A run rate, if you will, roughly speaking, if you go from the first to the fourth quarter, we were about $3 million, $2.9 million, $2.6 million and about $2.3 million for the fourth quarter.

Fourth quarter started a little bit favorable as a run rate going forward. You are probably going to be closer to the average of the – the last three quarters. In our first quarter, we always have an uptick like everybody else because of payroll rates, resets and things like that. So it’s not going to be sustained at the fourth quarter run rate. It will be certainly higher than that.

Darren Lehrich – Deutsche Bank

Okay.

Steve Everett

University of Cincinnati as well in the first quarter.

Andrew Jeanneret

Yes, sure. So we will see that again for 2010 and 2011 of almost 300,000. But usually it’s at the end of first quarter for that University of Cincinnati grant.

Darren Lehrich – Deutsche Bank

Very helpful. Thank you.

Operator

Thank you. (Operator Instructions). I am showing no further questions, sir.

Steve Everett

All right. Well, very good. We want to thank you all again for your time this morning and look forward to speaking to you at the end of the first quarter. Have a great day.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may all disconnect. Thank you and have a nice day.

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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.

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Source: Dialysis Corporation of America Q4 2009 Earnings Call Transcript
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