DaVita Inc. Q4 2007 Earnings Call Transcript

| About: DaVita HealthCare (DVA)

DaVita Inc. (NYSE:DVA)

Q4 2007 Earnings Call

February 13, 2008 5.00 pm ET

Executives

LeAnne Zumwalt - VP of IR

Kent Thiry - CEO

Jim Hilger - Acting CFO

Rich Whitney - CFO Designate

Analysts

Gary Lieberman - Stanford Group

Darren Lehrich - Deutsche Bank Securities

Bill Bonello - Wachovia Capital Markets

Andreas Dirnagl - JPMorgan Securities Inc

Justin Lake - UBS Securities

Chuck Ross

John Ransom - Raymond James

Paul Lee

Mark Arnold - Piper Jaffray

Jeff More

Operator

Good evening. My name is Miata, and I will be your conference operator today. (Operator Instructions).

Ms. Zumwalt you may begin your conference.

LeAnne Zumwalt

Thank you, and welcome everyone to our fourth quarter call. We appreciate your continued interest in our company. I'm LeAnn Zumwalt, Vice President of Investor Relations, and with me today is Kent Thiry, our CEO, Jim Hilger our acting CFO and Rich Whitney, who will be our CFO, effective March 1st.

I'd like to start with the forward-looking statement disclosures. During this call, we may make forward-looking statements, which can be generally identified by the content of such statements or the use of forward-looking terminology and includes statements that do not concern historical facts. All such forward-looking statements are subject to known and unknown risks and uncertainties that could cause the 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 and form 10-Q, and 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, new information, future events, or other developments.

Additionally, our press release and related disclosures include certain non-GAAP financial measures. These measures should be considered in addition to the results prepared in accordance with GAAP and should not be considered a substitute for GAAP results. Also included in the press release is a reconciliation of these non-GAAP measures to the most comparable GAAP financial measures.

I'll now turn the call over to Kent Thiry.

Kent Thiry

Thank you, LeAnne. As you already know, our Q4 operating income performance fell in the middle of our guidance, I will go ahead and quickly review three items, clinical results, government policy and our 2008 forecast and longer term outlook.

First at the clinical results, we are first and foremost, a caregiving company with 107,000 patients. I will quickly reference tow specific outcome measures. First, adequacy, which is essentially how well we clean the toxins from our patients' blood, 94% of our patients received [KKV] review of 1.2 or greater in the quarter.

The second clinical area I will comment on is Anemia, where 82% of our patients had hemoglobin greater than or equal to 11, which obviously means that 18% of our patients were less than 11. This represents a 25% increase in sub 11’s versus about a year ago. It appears physicians are reacting pretty strongly to CMS’s new EMP policy and in their efforts to keep patients below 13 or ending up with more patients' sub 11.

Our affiliated physicians have been very proud of their historically low percentage of patients having less than 11%. And we're working hard to support them in their efforts in this area. Our clinical outcomes continue to compare very favorably to the rest of American providers.

Second topic area, Washington DC conversations have started on Medicare once again. The House of Representatives are studying with last year's bill that they've passed, although they know it surpasses anything near its current form. Bundling and an update, but once again be on the agenda, congressmen's agenda that is, as well as Special Need Plans and maybe one or two other items. It is too soon to do any predicting about what will happen there.

Topic number three is our outlook going forward. Several points; Point A: we are maintaining the guidance that we previously provided. Point B: as we've explained before, the drop in our operating income run rate was in part driven by market factors and in part driven by underperformance by me and the team. Point C: we are entering into a period of above average uncertainty around our operating income trajectory.

Point D: for those who are comparing us to FMC, it is relevant to note that if you adjust for geographic and other factors, one would expect their average revenue per treatment to be higher than ours on a simplistically normalized basis. The primary driver of this is our disproportionately larger presence in a couple of the geographies, with average lower rates, because of higher managed care penetration.

Point E: we are not providing any guidance for '09 at this time; it suffices to say the range of QI outcomes is significantly larger than normal if you look out into that timeframe. And as we said as early as 10 months ago our '09 QI could be flat or down from '08. We are acutely sensitive to the fact that this very substantial uncertainty around the QI trajectory makes it very difficult for you to value your equity investment, real or contemplated. There is just simply no avoiding this uncertainty, however, because on the payers' side, point one payers have consolidated.

And they are paying more attention to ancillary services and benefits, like ours. Thirdly, private rates have been increasing over the years. On the other hand, on the DaVita and provider side of the equation, in particularly now from DaVita, we have a strong geographic foot print, that's point one. Point two we have strong clinical outcomes that save the payers a lot of money, especially in terms of hospitalizations. Point three; we have stronger relationships with physicians and patients. Point four; our competitors share the unfortunate reality of loosing money in nearly nine out of 10 patients. And point five; we have restored our internal capability to its historical levels.

When you put all these facts together it would simply be irresponsible for anyone to project with confidence exactly how the next year or two will shake out. It appears there are going to be some long and intense negotiations and market skirmishes during that period of time, and we are geared up to fight for reasonable rates, reasonable both in absolute terms and relative to our competition.

I'll now turn it over to Jim.

Jim Hilger

Thanks Kent. I'll address a few questions about our quarter results. First, regarding the major drivers in the quarter. QI results were primarily driven by several major factors. The first is treatment growth; second, a decline in dialysis revenue per treatment. The primary drivers of which were lower private insurance reimbursement and lower utilization of physician prescribed pharmaceuticals.

Third, patient care cost per treatment declined when normalized for the $6.8 million of one time insurance settlements in Q3. This cost decline is due to a decrease in utilization of physician prescribed pharmaceuticals. And fourth, an increase in G&A to the seasonality, the timing of consulting and other purchase services, and for the ramp up for the launch of additional village helps special needs plans which will continue in 2008.

As in the past G&A will fluctuate from quarter-to-quarter, but you should expect us to be in the range of 9% to 9.5% of revenue for the year. A few things that you should consider as you look to Q1 2008 operating performance. First, Q1 has 2.2 fewer treatment days than Q4. Second, Q1 will see seasonally higher payroll taxes, which we estimate to be about $1 a treatment. For these reasons, all else been equal to [QOOI] in Q1 could be flat or down relative to Q4. What about cash flow for 2007? Operating cash flow for 2007 was strong at $533 million. Cash flow for Q4 was particularly strong due to the timing of working capital and in particular the collection of accounts receivable.

DSO decreased two days, due to strong collections performance in the quarter and two days due to a reclass of our health plan receivables to other receivables on the balance sheet.

In addition, you should remember the cash flow will tend to be higher in Q2 and Q4, due to the timing of our semi-annual bond interest payments. What about cash flow for 2008? Our operating cash flow for 2008 is expected to be in the range of $480 million to $530 million. Maintenance CapEx should be in the range of $120 million.

I will now turn over the call to Kent for closing remarks before we move to Q&A.

Kent Thiry

Separate from the short-term intensity around private rates, it is useful just to reflect for a moment on the fact that we still have a strong market position, strong recurring demand and absolutely no clinical ambiguity about who needs dialysis and who doesn't.

Operator can we please go ahead and turn it over to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions).

Your first question comes from the line of Gary Lieberman.

Gary Lieberman - Stanford Group

Thanks, good afternoon. Just sort of maybe you could elaborate a little bit on some of your comments, I guess to start specifically with what you might have meant by the underperformance by yourself and the team in the quarter?

Kent Thiry

With respect to some contracts that we were working on and negotiating for some of the analytical work, some of the contractual specific work and some of the negotiating was just not done up to our historical levels, and as a result some of the outcomes were different in a bad direction than they should have been. And there's just no other way to put it than that.

Gary Lieberman - Stanford Group

Okay. And in last quarter you actually gave some really good detail in terms of -- in one market where you saw some pressure, was that similar to this quarter, was it one market or was it more widespread in terms of the pricing pressure that you saw?

Kent Thiry

Yeah, if you look at the four month period late in '07 there was just a bit of a perfect storm and no one market explained any massive chunk. But we lost a dispute and a contract in one case, we had a dispute abruptly start -- then another, then we concluded some contracts, and in some of those we have some the performance problems that I just referred to a moment ago. So it was not explained in any dominant way by any one market. It was more a sort of a perfect storm combining the types of examples that we provided at the capital markets and a question with those examples rippled through and affected the full fourth quarter in a way that they hadn't in the third quarter.

Gary Lieberman - Stanford Group

And then I guess just sort of, one more follow-up, just in terms of the guidance of (inaudible) you're going to be at the low end of the EBIT range which you get, which is consistent with last quarter, does that take into account a continuation of the storm or the perfect storm or does that incorporate an improvement in the performance, and in negotiating and some of the other factors that impacted you?

Kent Thiry

Gary let me take a stab at it then you come back at me if I don't answer sufficiently. We do feel we have restored our operating performance with respect to all the facets around this issue, what it was historically. So, there shouldn't be any more of that. Second, a number of those things that happened, that were negative, either because of market forces or because of R&D performance are done now. And they are in the run rate. And so, in that sense they are behind us. We have got more battles ahead and we would be naïve to predict exactly how they are going come out, but we think we have got a very reasonable chance of winning a whole bunch of them. So, I don't know if I am getting to the core or not. Do you want to come at me again?

Gary Lieberman - Stanford Group

I mean, just another way, are you more optimistic as you look out to '08 than on the commercial pricing front than perhaps you have been in the past, let's say two quarters?

Kent Thiry

Well I think all I can say is we have incorporated a very somber, intense chunk of analysis into our guidance for '08 and our comments on '09. And so, that's probably the best sort of net answer to the question. I certainly believe we are not going to replicate the performance of the last four months of the year from an operating point of view. But it's just so difficult to predict how negotiations are going to go, because there is this other side and there is what competitors do. So, I think I can't go further than just sort of pointing to the guidance unless you can maybe sit in the queue for a bit and come back and take another swipe at another question.

Gary Lieberman - Stanford Group

Okay. Maybe I'll do that thanks a lot.

Kent Thiry

All right thank you.

Operator

Our next question comes from the line of Darren Lehrich.

Darren Lehrich - Deutsche Bank Securities

Thanks, hi, good afternoon. Couple of things just with regard to revenue per treatment and this is the second consecutive quarter in which it was down sequentially. So just to take another stab at what Gary was asking, and just want to get your view on revenue per treatment over the next several quarters. Do you expect it to stabilize around this level or do you think it continues to drift down?

Kent Thiry

Well, our answer was in the context in the year, not the first quarter, like Jim already commented on some of the dynamics that happen in the first quarter.

Darren Lehrich - Deutsche Bank Securities

Sure.

Kent Thiry

There is still downward pressure on commercial rates. And so, if we lose in a bunch of the battles then our revenue per treatment will go down, if we win in a bunch of them, it will go up. And so, I think the word stability is not one that we can talk about, although of course the net effects could be one that looks stable on the surface, so there's a lot going on here over the next year too, and there's upside and there's downside. So did that help?

Darren Lehrich - Deutsche Bank Securities

Little bit. LeAnne do you want to say something?

LeAnn Zumwalt

Yeah, I was just going to refresh the memory on Q3, remember that was mostly the AFP change for the epogen and epogen utilization. So, Q3 decline was really more driven by pharma than it was payer negotiation.

Darren Lehrich - Deutsche Bank Securities

Okay. So on the pharma piece maybe just refresh us you (inaudible) hemoglobin percentage, but what's your view on epogen utilization, having an impact over the next several quarters and next year just as it relates to the impact on revenue per treatment? Just so we can understand where you are and your view on that as a factor over price?

Kent Thiry

Yeah. Predicting EPO utilization right now is just difficult, because the EMP regulation clearly affected a bunch of physicians prescribing in the way that I outlined. And so, one of the factors that creates some of uncertainty around our revenue per treatment comments, is EPO and exactly what's going to be used and what's not. Now a whole lot of those changes in utilization have virtually no impact on economics, because of course [we don't need to] buy the drug and most of our patients have Medicare and there is a very tiny margin there. But in context of the question about revenue per treatment EPO uncertainty is one of the things contributing to the revenue per treatment uncertainty.

Darren Lehrich - Deutsche Bank Securities

Okay. And if I could just switch gears here to the balance sheet and just some commentary around capital deployment, I know you said Rich was on the call, hi, Rich. In your prior tenure you did a great job restructuring the balance sheet and I am just wondering if you can give us any feedback on how you feel about the balance sheet now and what you do differently? I think there is a view that you may be holding too much cash and you could be buying back some stock given more leverages so would love to just get your thoughts?

Rich Whitney

Sure. I think, since 2000 and continuing until today the company has been very consistent on its views as related to capital structure management, I think that the actions, and follow the words, alter that period and our view on it is that this is a business that can support a reasonable amount of financial leverage. And it is a business that should have some financial leverage in order to improve the returns to shareholders. So, that hasn't changed. We've always characterized the term reasonable leverage as an estimate of 3 to 3.5 times debt to EBITDA.

And we've also always said, as you would expect, that this is really a long term target, that therefore there'd be periods of time when we'd be in that range, periods of time when we'd might be below that range, periods of time when we'd be above that range. And again if you go back and look at the history, that's been actually pretty accurate. As we sit here right now, if you look at our leverage ratio on net basis, debt minus cash, we're right around 3 times, so we're not really outside of that so called sweet spot.

And I have been part of our conversations on the topic here, but from my perspective given the state of the financing markets, it's probably not a bad idea to hang on to that cash rather to have them paying down debt. I think that if we thought we could re-borrow the money readily on the same terms, we probably would have just paid down debt during this period so that's my perspective.

Darren Lehrich - Deutsche Bank Securities

Very helpful. Thanks a lot.

Rich Whitney

You’re welcome.

Operator

Your next question comes from the line of Bill Bonello.

Bill Bonello - Wachovia Capital Markets

Hey. Good afternoon you guys. Hi, Rich. Couple of things, can you remind us again or just say again, because I didn't hear it why G&A went up $14 million sequentially and to 10% of revenue?

Rich Whitney

G&A went up for a number of reasons. One is seasonality. The second is the ramp up of our special needs plans for village health. And the third is the timing of consulting in other purchase services.

Bill Bonello - Wachovia Capital Markets

Okay. Kent, when you think about G&A going forward, I mean it seems like back when you did the Gambro acquisition there was immediate step up in G&A and one of the exciting opportunities was that that could probably come back down, as you integrated that. But instead it's essentially all eaten up by this R&D or whatever. Should we permanently think of G&A as having to be above 9% of revenue, is that kind of where you have to operate as a company?

Kent Thiry

I wouldn't concede that point. And it remains true that we have, on a apples-to-apples basis brought down G&A as a percent of revenue, a fair amount since the deal. And it's partially offset by the change in stock option accounting, I think that's something like 0.6%. And then as you pointed out some of the G&A, some of the new R&D and strategic initiatives. But I would guess, that over the next couple of years some of those initiatives are either going to start growing their top line, in a way that brings down that ratio or we're going to conclude that they are not working and therefore will scale down the expense. And so one way or another I think there'll be some pickup, some leverage, in this part of the cost structure. But not in '08 or 09 and of course if we come up with some other R&D experiment idea that could change what I just said. But we've put some pretty significant stakes in the ground and within the next two three years we will have a pretty good idea if they are going to add materially to shareholder value or not.

Bill Bonello - Wachovia Capital Markets

Okay. And so, just to make sure I understood the answer, in '08 or '09 still above that 9% probably?

Kent Thiry

Right for '08 we said 9% to 9.5% and for '09 I wouldn't see any reason to suggest it being any lower right now as we sit here today.

Bill Bonello - Wachovia Capital Markets

Okay. And then just revisiting the cash question, that Rich your comments about cash versus paying down debt, they make a hack of a lot of sense, but with almost $0.5 billion of cash on your books and your stock down $13 since October, is there a point at which share repurchase becomes attractive?

Rich Whitney

Bill, we always said about the business and other thing that has changed is that over an extended period of time it's likely that the business is going to generate more cash than we can invest in attractive growth opportunities, primarily acquisitions in de novos, but also some of the strategic initiatives that Kent mentioned.

And therefore if you put on a multi year add it is always reasonable to think that we might buy back some stock, particularly given what we say about [thanking] the business should have a reasonable amount of leverage on it. So, to take it further and kind of ask us to speculate on when the stock prices, undervalued or overvalued, I think would -- this is not something that we would be comfortable doing. And we would probably get it wrong.

Bill Bonello - Wachovia Capital Markets

Okay. Just to follow-up and then I promise I'll hop back in the queue, but I mean it's a massive amount of cash, and you don't need that much cash, I presume, for working capital. And so, the alternative than is that you're keeping things available strategically, it doesn't seem like within the dialysis world you could put anywhere near that kind of money to work. So, should we be at least contemplating a relatively large spend on something outside of dialysis?

Jim Hilger

I think that's highly unlikely in the near term, Bill. The fact is however, there could be some things that come available within the dialysis space that could eat up a bunch of that cash. And in addition if you are willing to go outside of '08 and we did by a the [Home IV] company this past year and we're intensely learning, and listening, and observing, and hoping that we conclude that that's a place where you would like to deploy some capital, since that's still a pretty fragmented market in some respects. That's the matter of factor that effects our planning for '09 and 2010.

So I think (inaudible) was a little more dismissive of the capital that might be productively deployed in the dialysis space, particularly during a time of fear and uncertainty. And then separate from that we hope, we conclude that this new segment is worth putting some growth capital into.

Bill Bonello - Wachovia Capital Markets

Thank you, Kent. That's actually very helpful.

Rich Whitney

It's a risk of being redundant, just to make sure we communicate this clearly, given the state of debt market, our debt the last time I checked was trading at like, 94. So, if we were instead of holding this cash right now pay down the debt, as it stands right now, it'd be much more expensive to re-borrow it.

Jim Hilger

Yeah, no questions on that front.

Kent Thiry

Thanks Bill.

Operator

Your next question comes from the line of Andreas Dirnagl.

Andreas Dirnagl - JPMorgan Securities Inc

Good evening guys, to keep connecting some of the dots, that I think Bill was trying to connect there, Kent to take your commentary, can it a be a little more blunt, what you said was there are some dialysis assets that may become available? Is it a safe assumption to say that given the FTC problems you had last time around? It's unlikely that you're going to make a domestic dialysis acquisition of the size that would eat up a significant portion of your cash?

Kent Thiry

No that's not safe to say, that we have the ability to buy a significant number of additional dialysis centers in America, without any significant antitrust issues.

Andreas Dirnagl - JPMorgan Securities Inc

And the question then becomes, are those available in a group? Or is that going to be a one off transaction that you would complete over a year or two?

Kent Thiry

Both, is the short answer. There are a number of, as we call them MDOs Medium Dialysis Organizations. So those are pretty sizable chunks. And then there are host of the independents and the irony is, if in fact the entire community starts to experience significantly more intense rate pressure, the percentage of those independents and medium sized organizations that are interested in selling, will go up.

So, to get back to your original question, it is not a good assumption, right now, to say that we could not deploy a significant amount of that cash to buy domestic dialysis businesses. Now, on the FTC front you recognized it's not a precise science, but we have certainly done our share of the work on it, and in lots of parts of the country we have very substantial latitude.

Andreas Dirnagl - JPMorgan Securities Inc

Okay. And then may be just two other quick questions. Talking about EPO utilization, in the past quarters you discussed it as being down in the 3% to 5% range. And specifically in the third quarter you said it was clearly a little bit more towards the 5% range in terms of the declining EPO utilization. Are we still within that range, even in the fourth quarter, with the additional decline? Or are we seeing greater declines in that sort of 5%, significantly greater decline?

Kent Thiry

Yeah. Just to recap the history for people who are newer to this aspect of our situation, what we said about a year ago, almost exactly a year ago, was 2% to 5% reduction in EPO was our guesstimate, as to what would happen with all the trauma and publicity and all of the rest. And then in the fall, we said that we are at that 5% number, so nine months later we are right about where we had put the upper end of our guesstimate.

And we said we could no longer predict, what would happen next, because we didn't have any idea what the EMP policy would do and how physicians decision making would be effected by that, and whether or not it there would be any spillover from the controversy in oncology and all the rest of the stuff going on. So, at Capital Markets and in the fall, we just said we are at the 5%, that’s consistent with what we said. And now for the next nine to 12 months all bets are off. Since, then there have been additional declines in EPO use, but it'd be inappropriate to put a number on it, because it's only been a couple of months. And it just could be too misleading in either direction.

Andreas Dirnagl - JPMorgan Securities Inc

Okay. Was there any sort of, and I know you don't like the word, but stability or even upward trajectory, once we went half the actual new label? Either November timeframe and you were half way through the first quarter of '08.

Kent Thiry

Yeah. I don't know what the answer is to that specific question. And I am looking at LeAnne, she does not either. So maybe follow-up with us on that, all right? But I don't think you can be able to (inaudible) even if given the precise numerical answer to your question about post label, I don't know whether that's going to help, trying to guess what's going to happen in the next six months.

Andreas Dirnagl - JPMorgan Securities Inc

No, I am not looking, trying to guess for the next six months I am just trying to figure out what it did in the last quarter. And that leads me through my last question, which is you kind of identified the pieces of the negative drivers to average revenue per treatment, as being sort of contract changes, as well as this EPO utilization. And I am trying to figure that if you could give a little bit more color just in terms of was it one more than the other, were they relatively equally weighted in terms of their impact?

Kent Thiry

That was definitely in the private rate side by a very significant margin versus EPO.

Andreas Dirnagl - JPMorgan Securities Inc

And that probably leads to the comments that you made, both at our conferences, as well as today in terms of that's not something necessarily that you would expect or watch to extrapolate going forward. That is, using that there was a certain aspect of that that was your own fault for lack of a netter churn.

Kent Thiry

Correct. But I have to add on to that, we are not going to repeat some of the mistakes we made in our four month period, of a couple of different flavors, that cost you and our other share holders bunch of money. That is not going to happen, we've fixed that stuff. Having said that we got some very intense negotiations coming up and a wide range of outcomes from positive to negative. And even assuming our historical level of performance in the payer contracting area, it would just be dumb of us, to say that we couldn't more precisely predict what the outcome will be. So, am I being clear on that, Andreas?

Andreas Dirnagl - JPMorgan Securities Inc

Absolutely. And then final question you made an interesting comment, which is that you talked about the fact that we're just beginning to start discussions about potential inclusion of some dialysis issues in, what I would identify as the physician fixed bill. I think it’s interesting if you would probably took a poll of investors on this call most of them would probably tell you that they've heard or consider it to be dead issues. And I was wondering do you think that's correct? Or do you think that there is a chance that you can still get some legislation passed this year?

Kent Thiry

Meaning that physician fixed in dead or dialysis.

Andreas Dirnagl - JPMorgan Securities Inc

The dialysis specifically MSP extension and Medicare composite rate increase.

Kent Thiry

Yeah. On MSP right now there is a lot of opposition, there was in fact a small amount of very intense opposition to MSP in the in fall. And that kilted it, as you know. And so, right now it would be, anybody who tells you that they are optimistic about MSP being resurrected in the next few months, you should loose all faith in their judgment. Having said that, it's good healthcare policy, you have to pay for it, and those ideas are never dead. But right now nobody has run around promoting it. But there is a broad base of by bipartisan support for it, it is a matter of policy that just happens to not really matter right now.

On an update anybody who tells you that that’s dead for being a part of the physician fix, I would say is, being pretty much sure.

Andreas Dirnagl - JPMorgan Securities Inc

Okay. Great, thank you.

Kent Thiry

Thank you.

Operator

Your next question comes from the line of Justin Lake.

Justin Lake - UBS Securities

Thanks, couple of questions here, you mentioned the very intense negotiations coming up. I'd be curious just to hear your thought process on just comparing maybe the, how the negotiations slate looks for 2008 versus 2007. Do you have more bigger contracts, you going to be renegotiating here or do think it's kind of in line without 2007's?

Kent Thiry

Yeah, right now and of course all that stuff can change, right now, the bulk of business that's on the table or in play is comparable. The level of resources and proficiency and competence and attention we're bringing to it is better more like what we did in '06, '05, '04, '03, '02, '01.

Kent Thiry

It doesn't guarantee us any thing, but it's better than nothing.

Justin Lake - UBS Securities

Absolutely. And then just as you think about the, you mentioned the third quarter most of the decline was from a utilization stand point on the pharma side, the fourth quarter you said it was mostly commercial. And you brought a couple of pieces there. I am just curious, you said one was a difficult competitor, one was under performance and the other was just kind of the normal win some, loose some.

Given the fact that we would like to think your colors are not going do anything dumb, going forward. And you under performance issues are cleaned up. I am just curious if you can break that down for us, as far as, how much of the fourth quarter decline was the function of just the normal win some, loose some versus those other two performance, which hopefully won't will reoccur?

Kent Thiry

Yeah. It's a very reasonable question, kind of one, subjective and arbitrary to try to allocate, since all those things tend to sort of overlap. Let me take one stab at it and see if this is helpful. I am going to say something which is true, but I worry you are going draw an inappropriate conclusion from it. A very substantial chunk of what happened to us in Q4 at the end of '07 should not have happened, we underperformed. That explains the substantial part. So that part is not 10% of what happened or 18%.

So, that's embarrassing. And on one hand, one might say will that bodes very well, if they are being realistic in saying that they have restored their historical level of confidence. That's where I would say just be careful because there's a real formidable side of football team on the other side of the ball, and even if we played better than we have in the past we're not cocky about how this stuff plays out. So, that's more data and that goes a pretty long way to addressing your question about the fourth quarter, but I worry if you infer too much on that and extrapolate forward.

Justin Lake - UBS Securities

No, I think, that was very helpful and I will try to not to extrapolate too much. Just last question on the fourth quarter compression on the payer side, should we expect, given that these renegotiations always take place at different times in the quarter, can you tell us, if most of the private rate compression that you saw is run rated in that number that you reported here? Or could some of it have happened in December and we should see some it weak out in to the first quarter?

Kent Thiry

Okay. What I am going to do is put you on mute for 30 seconds and see if there's a way we can add value and give an answer that makes sense, okay? So bear with me rather than have me just sort of say I can't answer the question and just give it a try okay.

Justin Lake - UBS Securities

I am going to wait.

Kent Thiry

Okay. Thanks for everybody's patience, I think you'd be happy we did -- right now everything bad that has happened, if we just put that title on it, is in the run rate that you're seeing. So, there's nothing that happened on December 15th, which is not fully reflected therefore in the quarterly run rate number.

And of course no statements are 100% true, but the statement I just made is or we just made is certainly 90% or more true that all the serious incremental things that happened are reflected in the run rate you saw. And going forward it will either go up or down or stay the same, based on new big outcomes, not the rolling forward of old ones.

Justin Lake - UBS Securities

And the last question, just on CMS, I've heard that there potentially could be a bundling proposal eminent. Is there anything you might be able to share with us on that?

Kent Thiry

Yeah. The rumors are that, perhaps as early as tomorrow, CMS will come out with the bundling report that was commissioned a long time ago. And on which they did a lot of work. And it got held up for various [sundry] reasons. So, therefore the rumors are of reasonable quality, as rumors go, and therefore there is that significant probability that it will come out soon. And if you would ask us to guess what it will say, we would guess that it will say something like bundling is a good idea, we think bundling is doable, but be careful, because if you do it wrong it could really blow up in your face.

Justin Lake - UBS Securities

That's great. I am all done, thank you.

LeAnne Zumwalt

Thanks, Justin.

Operator

Your next question comes from the line of Chuck Ross.

Chuck Ross

Good afternoon. I may have missed it, when you gave maintenance CapEx for this year, did you also give what you expect to spend in growth CapEx, as you've done on the past through de novo or small acquisitions. If not can you give that please?

Jim Hilger

Maintenance CapEx for 2008 is expected to be …

Chuck Ross

Yeah, you gave that, what I missed was you normally give growth CapEx. We don't de novo's etcetera….

Jim Hilger

We project growth CapEx for 2008 to be in a range of $150 million to $200 million.

Chuck Ross

Okay. And in this past year you spent about $400 million on CapEx, acquisitions, your also going to spend $270 million to $320 million in total CapEx this year. I am trying to understand when you talk about flattish operating profit this year, maybe flat to even down a little bit next year, and all the uncertainty, yet you actually continue to spend at a very healthy rate for growth, so I'm trying to understand kind of how those tow things go together?

Kent Thiry

Yeah, it's a very legitimate question and fortunately there is a very straightforward answer, that if you have a very attractive return on equity, on a risk adjusted basis, and then some bad things happen and it goes down a little bit, but it is still an attractive return on equity, risk adjusted. You keep on investing capital, because its way better than the alternative things to do with it, so that's why.

LeAnne Zumwalt

And Chuck, remember this past year we brought the infusion business which was $85 billion of that, so that was slightly different than what we would historically just spend on dialysis.

Chuck Ross

Okay thanks.

Operator

Your next question comes from the line of John Ransom.

John Ransom - Raymond James

Good afternoon, I apologize I'm joining the call a little late from the airport, but did you quantify those fourth quarter and 2007 total investments in both the DeVita Village as well as the dilution from the home infusion deal?

Kent Thiry

The home infusion deal is just not material, because it's so small. I don't even know the mathematical answer off hand, but it's very tiny. And then on Village health, what we disclosed in Capital Markets is that if you look at '07 and you look at '08 the operating income deficit in each of those years would be some where between $12 million and $20 million.

John Ransom - Raymond James

And is there any thing else you are doing from an R&D stand point that could be characterized as discretionary?

Kent Thiry

The short answer is yes. And the largest item in that category outside a Village Health is our specialty pharmacy. And in the Capital Markets Day we talked about that in '07 and '08, having losses in the same range as Village Health. And in fact what was happening is one was going from kind of 12 in '07 to 20 in '08. The other was going from 20 in '07 to 12 in '08. So, the aggregate is basically identical year-over-year for the two as a group.

John Ransom - Raymond James

All right. I mean outside looking in and recognizing there are lot of things we don't know outside looking in, between the negative [arc] you have on your cash and the (inaudible) that you are making here. I mean one, yes, one could easily conclude, I mean there is $0.30 of earnings right there, that’s not being shown by the way you are choosing to run the business not right or wrong, not that there is anything right or wrong about that but just the earnings power of the company has been masked a little bit by some discretionary decisions you guys are making.

Kent Thiry

Very fair point but we just might want to change the verbs a little bit, I mean it's not been masked, because we disclosed it, in order that everybody could evaluate the longer term upside versus the short term trade off, which you've accurately characterized.

John Ransom - Raymond James

Okay.

Kent Thiry

So, we didn't mask, quite the opposite, but everything else you said is very true and our Board is very intense about continuing to push on that all these investments make pragmatic sense.

John Ransom - Raymond James

And here's the stupid question of the call and I've never asked the company -- if your debts are trading at 94, company's tender for bonds all the time at various prices, what's that to keep you from going to a hedge fund or some holder of your debt and offering and making an offer that is less than par, as a more accretive way to get average. [I guess if the cash holders] the one thing I really don't understand the deliberate negative arbitraged cash versus debt, that’s what you're choosing to do. And is there a way to circumvent the par versus the 94, math that we talked about?

Jim Hilger

I think the answer to your question of what keeps it from doing that, let me answer that, that is nothing, so that is a possibility, the issue however is that once we do that our ability to re-borrow on similar terms is quite limited, so that would be the trade off.

John Ransom - Raymond James

Right.

Jim Hilger

Not materially, but certainly your point is, it is something that can be considered.

John Ransom - Raymond James

Okay. I mean if you could go and then have $800 million plus of cash (inaudible) the same shares outstanding and that's going to be just part of your [transaction] anyway that seems like in an abundance of conservatism so I will leave at that. Thank you.

Kent Thiry

Yeah. The interesting thing is that had we just pay down debt we're sitting here at three times gross leverage instead of three times net leverage, maybe it would be a different conversations. So, really if you come back to this issue of there is some short-term uncertainty in financial markets and therefore we need to be careful about having enough financial flexibility to meet the business needs. Am by saying business needs I mean stability and investing growth opportunities etcetera.

Operator

Your next question comes from the line of Paul Lee.

Paul Lee

Yes, sorry my phone line was muted. I notice that you have closed 20 centers, which you provide administrative services. Can you discuss what's the thinking behind that decision?

LeAnne Zumwalt

Yes. Actually it's not that we closed them, we have been providing administrative services over a long period of time to a group in building their management capabilities and they have taken on the administrative deals related to those centers themselves. So they are building and have built their capabilities.

Paul Lee

Okay. If my counting is right you still have 13 centers you provide the administrative services for, right?

LeAnne Zumwalt

I think the number is slightly higher than that but let me -- I'll look at here for a second.

Jim Hilger

It’s approximately 1% of the -- but I don't know the exact number is, it's only about 1% of the installed base. The exact number is…

LeAnne Zumwalt

Yeah, 13 where we provide administrative services in the there are about 10 additional ones where we have a minority stake.

Paul Lee

We should expect slowly you're going to terminate those service contracts or your customers once they develop their own capabilities they are going to terminate the contract. Is that a reasonable assumption?

LeAnne Zumwalt

I don't think so, no.

Paul Lee

Okay. That's all the question I have.

LeAnne Zumwalt

Thank you.

Operator

Your next question comes from the line of Mark Arnold

Mark Arnold - Piper Jaffray

Good afternoon I just had one follow-up question; you mentioned the home infusion business. Are you guys at a point where you could al least give an update now that you've had that business for a full quarter, its kind of how it's progressing in terms of your evaluation of that space? I know there was a acquisition just last week, a pretty good sized one in that space here and I'm just curious how you guys are evolving in terms of how your looking at the home infusion opportunity.

Kent Thiry

Sure, we are very pleased that the team appears to be as good as we hope they were. And as to any more striking conclusions about the business, we really have nothing to add, we felt good about it of course, which is why we entered this space, but haven't made any serious dramatic incremental conclusions beyond that where we're probably going to take a nice measured approach towards learning it before we do anything more dramatic.

Mark Arnold - Piper Jaffray

Okay. And then just one other question, I'm thinking back to your Analyst Day, have you guys given, you've given a guidance for CapEx spending and growth CapEx, but have you given an acquisition, number of acquired patients target like you have in the past for 2008?

LeAnne Zumwalt

Actually we didn't set a number historically, we have been in the range of targeting centers with about a 1,000 to 2,000 patients.

Mark Arnold - Piper Jaffray

Okay. Great. Thank you very much.

LeAnne Zumwalt

Operator do you have some one else?

Operator

(Operators instruction) We do have a follow up question from the line of Darren Lehrich

Darren Lehrich -Deutsche Bank Securities

Thanks for taking the question. There has been quite a bit of activity on the network benefits issue, and I am sure you saw New York AG get involved, I guess just a couple of questions: do you see pressure related to how payer apply, reasonable and customary rates that differ from your own? And do you think that the AGs case could be beneficial to the industry?

Kent Thiry

Okay. Let me take a stab, before I do it let me just clarify a couple of points that have been raised in the previous questions. We did close one or two centers in most recent quarter and that was for the classic reason, where we didn’t have enough private patients or the private rates were significantly higher than Medicare, weren’t high enough to offset the losses on the 90% of the patient who are Medicare and Medicaid and after that happens for a while we have to close some of those. And so, separate from the terminations of the administrative services agreement, I do want people to know that we did close one or two and we are not trying mask that.

Second on the acquisition front, our guidance for '07 was we thought we end up purchasing centers with an average centers for about a 1,000 patients and that's probably the right number to think about for '08. And then third on your question, Darren, we don't know enough about that New York case. What we've been told is that the Attorney General is concerned about insurance companies doing things with respect to out of network benefits that are not appropriate. And if that's what's it about then that is probably good for all providers because it is bad for us when our patients don't get the out of network rights that they bargained for when they bought the policy. But that's a really superficial response to your question because we don't know much about that that action at all.

Darren Lehrich - Deutsche Bank Securities

That's fair. And then just last thing and it's for LeAnne. Do you have any enrollment information to share with us on Village Health, the new product? I think the CMS data came out but it does lag the February data lag, so I was just wondering if you have any thing there.

LeAnn Zumwalt

No. Nothing to contribute now.

Darren Lehrich - Deutsche Bank Securities

Okay. Thanks.

Operator

Your next question comes from the line of Jeff More.

Jeff More

Good afternoon, everyone. Kent, just a couple of loose end kind of questions; most of them have been answered. You guys spent, it looks like, about $70 million in the fourth quarter relative to assets that are unconsolidated, is that consistent with what you have in your opening remarks there in the press release, the 50% non-controlling ownership interest in six centers? And if it is give us a perspective on the degree to which you might anticipate more of that kind of activity going forward? That would be question one.

LeAnn Zumwalt

Yes. That is a correct correlation and no specific comments now about future transactions we might undertake.

Jeff More

Okay. Fair enough. And then, owing to your conservatives and I am assuming the answer to this is none, but its fair to assume that within a context of your cash balances that there is nothing in the way of esoteric securities?

Kent Thiry

No. We have looked at the quality of these securities that we've placed our cash and cash equipments. And then we are very comfortable that they are either U.S. Securities or AAA rated securities.

Jeff More

Fair enough. And then last but not least just as a point of clarification. I think I understand you guys have articulated well the reasoning's behind keeping the cash on hand for what its worth. I think the debt is actually more like $0.90 or $0.91 today, Rich.

Rich Whitney

Great. Thanks.

Jeff More

All right, guys, thanks very much.

Kent Thiry

Thanks Jeff.

Jeff More

I appreciate it, Kent.

Operator

We do have a follow-up question from the line of Andreas Dirnagl

Andreas Dirnagl - JP Morgan

Yeah. Just a couple of quick sort of housekeeping things. Can anyone there maybe provide a little bit of comment just what's going on, on the non-treatment revenue line? We saw a pretty significant jump this quarter and I don't think it can be explained away by infusion business because the jump I think was probably half of what they generated last year in revenue alone.

Rich Whitney

The growth in non-dialysis revenue was principally the full effect of the Home Infusion business as well as some small growth in our Pharmacy and Village Health operations.

Andreas Dirnagl - JP Morgan

Okay. And I know you guys only provide operating income guidance but can you maybe just provide some commentary on sort of the composition of your interest rate structure at the moment and to the extent that you would benefit from the significant decrease in rates that we've seen over the past couple of weeks?

LeAnn Zumwalt

Can you repeat the question?

Andreas Dirnagl - JP Morgan

Sure. Basically, I'm trying to get an idea of what your fixed floating percentages are and how much you think you're going to benefit from the decrease in rates that we've seen?

LeAnn Zumwalt

We're going to have to come back to you. I don't have that in front of me right at this moment, but we'll answer in a second.

Andreas Dirnagl - JP Morgan

Okay. And while you're doing that maybe Rich, one or two sort of questions or comments, one, first of all, personally just glad to see you back, but I noticed that it's specifically said in the press release today that you're only going to be doing this part time, is there not enough to keep you busy there a full time or it just that you're going to be working on a specific project?

Rich Whitney

There's plenty to keep me busy. The reason is I'm just not available right now to offer more than that amount of my time.

Andreas Dirnagl - JP Morgan

And is that sort of short-term? Would you expect over the next one or two years that probably by the end of this you'll be doing it more fulltime or is that going to be part-time for the entire time?

Rich Whitney

I would expect it to be part-time for the entire time.

Andreas Dirnagl - JP Morgan

Great. And then maybe just one more sort of question/comment, Rich, when you got in this pressure of this pushback in terms of what you're going to do with your cash and all the different options that you had, I mean you keep pointing to the fact that, yes, you could repay debt at or re-buy your debt at somewhat of a discount but that it would cost you more than if you needed to re-borrow that. The kind of the only way that that argument is really valid is if you expect a need to re-borrow it within a reasonably short timeframe.

So is that one way of potentially signaling that to the extent that you do, do something on the acquisition or the share repurchase side, that it's going to have to be sort of in a relatively, sort of, six months short-term? Because then otherwise that argument I don't think makes sense because of the carrying cost of the cash.

Rich Whitney

Yeah. I wouldn't directly imply that from our statements, but we're trying to keep from getting into a situation where if, in fact, we do have an opportunity that requires some cash that we wouldn't be in a situation for taking advantage of that as we have re-file all of our debt at much, much higher rates. So that's the reason why.

Andreas Dirnagl - JP Morgan

Okay. Just to be clear, the idea of keeping cash on the balance sheet in these uncertain times, which is what you've said, really has more to do with taking advantage of potential opportunities not because you think you need more cash.

Rich Whitney

Again, this is my perspective because this is literally my first day. So from my perspective, it is prudent at the moment to hang on some cash rather than to pay down debt for the reason that I have mentioned.

LeAnne Zumwalt

And Andreas, on your question, 80% of the debt is at fixed rate.

Andreas Dirnagl - JP Morgan

It is. Okay. Great. Thank you very much.

Rich Whitney

Thanks Andreas.

Operator

You have another follow-up question from the line of Justine Lake.

Justin Lake - UBS

Thanks. Just one quick follow-up. The incremental or the revenue that you mentioned, the $40 million up or $11 million or $12 million up, can you just walk us through, so the home infusion, pharmacy and village help is where it came from, where is the offsetting cost running on the P&L for that?

Rich Whitney

Both in patient care cost and in G&A.

Justin Lake - UBS

Okay. So the patient care cost are actually inflated somewhat because those would be kind of high non-dialysis costs? So they don't run through dialysis revenue or treatment in dialysis, but they do run through a patient care cost.

Rich Whitney

They do run to a patient care costs.

Justin Lake - UBS

And can you give us an idea of the split there?

LeAnne Zumwalt

No.

Justin Lake - UBS

Okay. Thank you very much.

Operator

At this time, there are no further questions. Do you have any closing remarks?

Kent Thiry

No, thank you all for your attention and consideration, and we will do our best here between today and the next time we get together on the phone. Thank you.

Operator

Thank you. This concludes today's fourth quarter Earnings Call. At this time, you may all disconnect.

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