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Edited Transcript of ARA earnings conference call or presentation 9-Nov-18 2:00pm GMT

Q3 2018 American Renal Associates Holdings Inc Earnings Call

BEVERLY Nov 14, 2018 (Thomson StreetEvents) -- Edited Transcript of American Renal Associates Holdings Inc earnings conference call or presentation Friday, November 9, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Darren P. Lehrich

American Renal Associates Holdings, Inc. - SVP of Strategy & IR

* Don E. Williamson

American Renal Associates Holdings, Inc. - Executive VP & COO

* Jason M. Boucher

American Renal Associates Holdings, Inc. - VP & CFO

* Joseph A. Carlucci

American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman

* Michael S. Anger

American Renal Associates Holdings, Inc. - Chief Medical Officer

* Syed T. Kamal

American Renal Associates Holdings, Inc. - Founder, President & Director

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Conference Call Participants

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* Anagha A. Gupte

Leerink Partners LLC, Research Division - MD of Healthcare Services & Senior Research Analyst

* Kevin Mark Fischbeck

BofA Merrill Lynch, Research Division - MD in Equity Research

* Patrick Thomas Feeley

Barclays Bank PLC, Research Division - Research Analyst

* Stephen Vartan Tanal

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the American Renal Associates Third Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Darren Lehrich, Senior Vice President of American Renal Associates. Thank you. You may begin.

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Darren P. Lehrich, American Renal Associates Holdings, Inc. - SVP of Strategy & IR [2]

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Thank you, operator, and welcome, everyone, to ARA's Third Quarter 2018 Earnings Call and Webcast. On the call today are Joe Carlucci, our CEO; Syed Kamal, our President; Jason Boucher, our Chief Financial Officer; Dr. Don Williamson, our Chief Operating Officer; and Dr. Michael Anger, our Chief Medical Officer.

I want to remind everyone that we may make certain remarks today that constitute forward-looking statements within the meaning of the federal securities laws. The company's actual results may differ materially from such statements due to a number of risks and uncertainties, including those described in our most recent Form 10-K and Form 10-Q, our press -- earnings press release and in our other filings with the SEC. Any forward-looking statements made today are effective only as of today, and the company undertakes no obligation to revise or update any forward-looking statement for any reason.

On today's call, we will refer to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most comparable GAAP measures are available in the earnings press release, which is available within Investor Relations section of our website at americanrenal.com.

Finally, as a reminder, we adopted ASC 606 effective January 1, 2018. And under this accounting standard for revenue, we are now reporting our revenue net of uncollectible accounts.

With that, I'm pleased to turn the call over to Joe Carlucci.

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [3]

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Thank you Darren.

We had a productive third quarter, which was supported by solid revenue growth, sustained performance with labor productivity, positive business development activity and continued stability with commercial payer mix in relation to the first half of the year. That said, our third quarter earnings performance was impacted by treatment growth that did not accelerate as expected in higher self-funded employee health insurance benefit costs. We believe there are plenty of encouraging signs to report to you, which give us confidence in the strength of our operating model, although given our year-to-date performance, it does look probable that we'll end the year at the lower end of our 2018 adjusted EBITDA less NCI guidance range of $105 million to $111 million.

First, let me speak to our treatment volume performance. Our third quarter normalized treatment growth was 6.1%, and this was modestly below our expectations due in part to slower ramping of de novo clinics as well as more of our 2018 pipeline openings pushing into Q4. We expected a modest acceleration of volume growth in the second half, which has not materialized. As a result of our year-to-date performance and expectations for the fourth quarter, we now expect our full year 2018 normalized treatment growth to be between 6.0% and 6.5% as compared to our previous expectation for 6.5% and 7.5%. Over the medium term, we believe this revised treatment growth outlook should be sustained due to our healthy de novo pipeline, occasional acquisition opportunities and the underlying growth of ESRD. We do not believe anything has changed in the environment, although we think it's prudent to assume this more moderate rate of treatment growth as our facility base continues to get bigger and some newly opened clinics take longer to ramp due in part to certification delays. We believe there could be some relief from the certification delays in 2019 due to our ability to contract with third-party independent accreditation organizations who could expedite surveys in regions where CMS resources are constrained.

Second, we are encouraged that our commercial payer mix on a volume basis remained stable with the first and second quarters of 2018, thus making 3 consecutive quarters of stability in 2018. Our ACA mix also remains stable at approximately 1% of total treatments, and this has remained consistent since Q1 of 2017.

Third, we continue to maintain the more efficient cost structure we established as a result of our 2017 operating initiatives, leading to solid performance with labor productivity. Our patient care cost increased primarily as a result of the introduction of calcimimetics in 2018 and underlying wage cost growth trends that remain consistent with our expectations. However, our self-funded employee insurance cost trends are tracking higher than our expectations, and this resulted in approximately $2.50 per treatment of negative variance on a year-over-year basis during Q3. Historically, self-funded insurance costs have increased approximately $0.50 over -- year-over-year. But year-to-date, the trend is closer to $3 per treatment. Our outlook assumes the higher self-funded health insurance expense trend from Q3 will persist into Q4, and we'll be watching this line item closely as we plan our 2019 outlook.

Fourth, we are encouraged by the level of interest from prospective new nephrology partners. We signed an additional 6 de novo clinics during Q3, bringing our signed pipeline to 30 deals. We expect to end the year within our guidance range of 15 to 20 new clinics added during 2018. This would mean that more than half of our 2018 clinic additions are expected to occur in the fourth quarter, and this is due primarily to timing delays of construction. High demand for contractors in the construction trades has impacted our ability to plan openings as accurately as we have in the past. Our project management teams will continue to work diligently to open clinics as efficiently as possible.

Now on to some numbers. Q3 revenue was $211 million as compared to $187.7 million in the third quarter last year or an increase of 12.4%. Q3 treatment growth, normalized for clinic sales over the past 12 months and fewer treatment days year-over-year, was 6.1%, and normalized nonacquired treatment growth was 5.0%. Q3 adjusted EBITDA less NCI was $26.6 million as compared to $28.1 million in the third quarter last year. Adjusted EBITDA less NCI was impacted year-over-year, primarily as a result of lower mix and rate. Our patient care costs per treatment in Q3 were $251, which increased $34 year-over-year primarily due to calcimimetics, higher employee health benefits costs and normal wage growth, offset somewhat by our progress with ESAs.

We continue to make solid progress on the expense side with the adoption of the ESA alternative, Mircera. As of September 30, physicians have chosen to convert to Mircera as the primary ESA in nearly 2/3 of our clinics. Based on strong physician interest in this long-acting ESA, we still expect physicians to be in the 85% to 90% of our clinics to have converted to Mircera by year-end 2018.

Our G&A cost per treatment in Q3 was approximately $42.50, which increased approximately $2 per treatment year-over-year. G&A was up primarily due to corporate investments we've been making to support our research and our integrated care initiatives, higher health benefit costs and higher professional fees.

Finally, let me close with a comment about the recent election in California. We are pleased that voters in the State of California resoundingly defeated Proposition 8. This ill-conceived ballot initiative would have been very bad for patients and would have resulted in reduced access to care, given the negative impact it would have had on dialysis clinics across the state. Tuesday's election results is a win for patients. We appreciate the hard work that went into the effort to defeat Prop 8 and are encouraged that more than 4 million voters understood the issue well enough to reject it. Although we have a small presence in California, we participated in funding the industry-wide effort to defeat Prop 8, and we expect our total 2018 expenses related to ballot initiatives in California and in Ohio could approach approximately $1 million, the bulk of which will be in Q4.

Now I'd like to turn the call over to Syed Kamal, our President, to give you an update on our business development during the quarter. Syed?

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Syed T. Kamal, American Renal Associates Holdings, Inc. - Founder, President & Director [4]

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Thank you, Joe.

We ended the third quarter with 235 clinics in operation, up 2 clinics from the second quarter due to de novo openings. Over the last 12 months, we have added 20 clinics, including 17 de novos that were opened and 3 acquisitions. Year-to-date through September 30, 2018, we have added 8 clinics. We have also sold or merged a total of 2 clinics over the last 12 months as part of our operating initiatives to rationalize the footprint with as little disruption as possible to patients and staff.

We continue to have good visibility into future openings due to a healthy signed pipeline, which stood at 30 signed clinics as of September 30, 2018. This is up from 26 clinics at June 30, 2018. As Joe indicated, our clinic additions abated more to the fourth quarter, but we still plan to add 15 to 20 new clinics during calendar year 2018, including one acquisition we have completed subsequent to the end of third quarter.

We remain very encouraged about the de novo pipeline given the increasing number of discussions we are having with both new and existing nephrology groups, and we look forward to continuing to affiliate with high-quality nephrology groups in other new markets during 2018 and beyond.

I would now like to turn the call over to Dr. Mike Anger, our National Chief Medical Officer, for the third quarter clinical update.

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Michael S. Anger, American Renal Associates Holdings, Inc. - Chief Medical Officer [5]

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Thanks, Syed.

I'm pleased to join everyone today to provide the third quarter clinical update. As you know, ARA's business model allows its physician partners to take the lead in the care of their patients. In this physician-driven model, our goal is to provide the highest quality of care.

I'm going to review just a couple of important clinical metrics and update you on recent developments related to calcimimetics.

The first clinical metric I'd like to discuss is Kt/V, a marker of adequacy of the dialysis treatment. During the third quarter of 2018, 98% of ARA's hemodialysis patients had a Kt/V greater than or equal to 1.2, the value at or above which is considered adequate dialysis. This measure has remained stable over the past year and demonstrates that we are providing adequate dialysis therapy to the overwhelming majority of our patients, and we are doing so on a consistent basis.

The next clinical metric I'd like to discuss is the vascular access of our dialysis patients. As has been discussed before in these calls, one of the focus areas for quality is the percentage of patients receiving dialysis through a venous catheter for greater than 90 days. A lower percentage is better because prolonged venous catheter use in dialysis patients may be associated with a higher risk of infection or hospitalization. In the third quarter of 2018, the percentage of patients who utilized catheters as their sole source of access for dialysis for 90 days or greater averaged 12% for ARA. This indicates that a meaningful percentage of ARA patients are receiving dialysis through a safer, permanent access, such as an AV fistula or an AV graft.

We constantly monitor numerous clinical parameters on all of our patients, such as Kt/V and vascular access, as they all serve as components of the ultimate goal of care, keeping patients healthy, out of the hospital and able to continue to dialyze in our clinics.

I'd like to close the clinical section with an update related to our recent progress with the calcimimetic transition. Starting on January 1, 2018, CMS implemented Medicare reimbursement for oral Sensipar and a new IV calcimimetic called Parsabiv under the Transitional Drug Add-on Payment Adjustment, or TDAPA. Calcimimetics are prescribed to dialysis patients to control secondary hyperparathyroidism, and these drugs are an important therapy in the management of bone mineral health. The transition continues to be managed well clinically and operationally. It is always the physician's choice to write the prescriptions or order the supply items that, from the physician's perspective, works best for their patients.

In closing, on behalf of ARA's clinical team, I look forward to participating in these calls periodically and updating you on these metrics and other important clinical measures that will help you understand our focus on high-quality patient care.

This concludes my remarks on the clinical side, so let me turn it over to Jason Boucher.

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Jason M. Boucher, American Renal Associates Holdings, Inc. - VP & CFO [6]

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Thank you, Dr. Anger.

Third quarter revenue increased 12.4% compared to Q3 2017, driven by a 7% increase in revenue per treatment and total treatment growth of 5%. Treatment growth continues to be driven primarily by the ramping of our de novo clinics and the underlying growth in the dialysis patient population. Revenue per treatment increased primarily due to the introduction of calcimimetic reimbursement in the dialysis setting, offset primarily by lower commercial mix on a year-over-year basis. Sequentially, payer mix was stable.

Adjusted for clinics that were sold over the past year and 1 fewer treatment day in the quarter compared to last year, our normalized treatment growth in the third quarter was 6.1%, and our normalized nonacquired treatment growth was 5%. Over the past year, we have sold a total of 2 clinics.

Our normalized treatment growth for the first 9 months of 2018 trended below our previously established full year guidance range of 6.5% to 7.5%. And given the year-to-date performance and the timing of our remaining clinic additions in Q4, we now expect our normalized treatment growth for 2018 to be between 6% and 6.5%.

Our revenue per treatment in the third quarter was approximately $364.50 or $24 above third quarter of 2017 RPT of $340.50. The year-over-year increase was primarily related to calcimimetics plus approximately $1 due to the effect of ASC 606 related to Medicare bad debt accounting and offset somewhat by lower year-over-year commercial mix and the rate impact related to the payer contract referenced earlier. On a sequential basis compared to Q2 2018, revenue per treatment was lower due to the $10 per treatment revenue adjustment recognized in Q2, $2 from lower Medicare bad debt recoveries as well as the partial quarter rate impact of the previously disclosed payer contract in the third quarter of 2018, which represents 1 month of being in network with the payer. RPT for calcimimetics was up slightly from Q2 to approximately $35.

I'm now going to move on to a discussion about the expense side of our P&L in Q3. Patient care costs in the third quarter of 2018, on a per-treatment basis, were $251, and this is up $34 from $217 per treatment in the third quarter of 2017. The patient care costs per treatment trend is primarily attributed to higher drug costs associated with calcimimetics and was also impacted negatively by higher employee health insurance costs. We experienced normal labor cost increases, and we are not seeing anything unusual with respect to wage pressure, although we did experience a higher-than-expected trend in our self-funded insurance costs. The impact of health benefit costs resulted in approximately $2.50 year-over-year increase on a per-treatment basis, the bulk of which was in patient care costs.

Our staff turnover metric remains low and fairly consistent with recent years. During Q3, we made additional progress from the higher rate of adoption of Mircera, although that was offset slightly by normal increases in labor costs and higher PD supply costs as expected. As of the end of Q3, physicians have adopted Mircera in approximately 2/3 of our clinics.

G&A expense in the third quarter of 2018 on a per-treatment basis increased $2 year-over-year to approximately $42.50 per treatment. This is primarily attributed to higher corporate costs, including the expenses related to our medical director meeting, which was not held in the prior year.

Adjusted EBITDA less NCI during the third quarter of 2018 was $26.6 million, a 5.4% decrease as compared to the third quarter of 2017. The year-over-year comparison was impacted primarily by a lower commercial mix, the partial quarter of in-network rates and the higher health benefit costs. NCI, as a percentage of adjusted EBITDA, decreased to 37.2% in the third quarter of 2018 from 39.9% in the third quarter of 2017. Our clinic ownership level has increased approximately 1 percentage point year-over-year to 55% at September 30. We expect our NCI percentage to be in the range of 38% to 39% for 2018 as compared to our prior expectation of 39% to 40% range for 2018.

We reported GAAP net income attributed to American Renal Associates Holding, Inc. of $2.5 million in the third quarter of 2018 as compared to $8 million in the third quarter of 2017. Our Q3 2018 non-GAAP adjusted net income attributed to American Renal Associates, Inc. was $6.7 million or $0.19 per share, excluding certain GAAP items as disclosed in our press release.

Turning to cash flow. For the third quarter of 2018, we generated $25.4 million of cash flow from operation, down from $45 million in Q3 of 2017. Third quarter 2018 cash flow was impacted by timing of working capital and the $10 million installment paid under the terms of the United settlement that we announced in July. After deducting distributions to noncontrolling interests of $20.9 million, our adjusted cash flow from operations was $4.5 million in the third quarter.

During Q3 2018, we spent $10.7 million on capital expenditures, of which $4 million was related to maintenance CapEx, and the remainder was related to development CapEx. We expect to deploy 1% to 2% revenue on maintenance CapEx and 3% to 5% of revenue on development CapEx in 2018.

As of September 30, 2018, our adjusted owned net debt was $464.1 million, and our adjusted net leverage was 4.2x our trailing adjusted EBITDA less NCI of $109.4 million. Our net leverage remains relatively stable with the 4.1x level at June 30, 2018. Our accounts receivable net of allowance represents 40 days of revenue for the quarter-end September 30, 2018, up 1 day from the prior year quarter DSO.

Let me move on to our outlook for 2018. We expect adjusted EBITDA less NCI to be in range of $105 million to $111 million. Although based on Q3 results and our outlook for the fourth quarter, we expect to be at the lower end of this guidance range.

Please keep in mind that our guidance continues to assume the following: personnel cost growth in the 2% range, excluding the higher-than-expected self-funded insurance cost trends discussed earlier; total normalized treatment growth for the full year of 6% to 6.5%; new clinic additions in the range of 15 to 20, which is similar to recent years.

As it relates to calcimimetics, we continue to expect calcimimetics to be a positive in 2018. While we are in the transition with Medicare, the environment for calcimimetics is expected to be dynamic due to additional coverage by non-Medicare payers, any introduction of generic version of Sensipar and changes in practice patterns with respect to IV drug, Parsabiv, and the oral drug, Sensipar, as clinicians gain more experience with these drugs in the dialysis setting.

Below the adjusted EBITDA line, all of the items we reviewed during our Q4 2017 earnings call, such as depreciation and amortization, interest expense, stock-based compensation expense and tax rate, are still relevant guideposts for your models for the full year 2018, with the exception of the NCI percentage, which we now expect to be 38% to 39% of adjusted EBITDA.

Lastly, our guidance excludes material lobbying, PR or consulting costs as a result of the ballot initiatives in certain states where we operate. Based on current information, we believe the impact of spending related to opposing the ballot initiatives could be as much as $1 million in total for the full year 2018, of which approximately 25% was recognized in Q2 and the remainder could be recognized in Q4.

I want to note that our range could be impacted by a variety of other factors that are discussed in greater detail in the risk factors in our SEC filings and press release. The biggest swing factor to our financial results continues to be further changes to our commercial mix in the reimbursement rates we are able to realize from commercial payers. Consistent with the past 2 years, we plan to issue annual guidance for next year when we release Q4 results in March.

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [7]

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Thank you, Jason.

In closing, I want to thank our entire organization, our staff and our physician partners for their contributions each and every day and for their unwavering dedication to providing excellent patient care.

With that, we'll be happy to take your questions. Operator, can you open up the Q&A session, please? Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Kevin Fischbeck with Bank of America Merrill Lynch.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [2]

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Wanted to ask about the United contract. I think you mentioned that it's -- it will include -- it was in a place for 1 month during the quarter. I think it was supposed to be originally be starting in August. Does that mean that there was a benefit in the quarter of like $1 million because of that delay?

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [3]

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Yes. Kevin, it's Joe. It was delayed 1 month for its operational issues. Nothing on their side or our side. It was just a matter of loading up our clinics into their system. So you're correct, it was a benefit for 1 month.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [4]

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Okay. And then, I guess when you talked about the commercial mix, it's good to see that the mix number is stable. But any more color about contracting rates and things like that?

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [5]

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No, I think that we are pleased as well with our commercial rate -- I mean, sorry, mix as it remains relatively stable over the -- well, last 4 quarters, actually. So second part of the question, Jason?

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Darren P. Lehrich, American Renal Associates Holdings, Inc. - SVP of Strategy & IR [6]

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Yes. It's Darren, Kevin. I don't think really anything more to say than that. It has been stable, and we're pleased to see that stability.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [7]

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But I guess from a rate negotiation perspective, is that also stable? Or any changes in contracting there?

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Jason M. Boucher, American Renal Associates Holdings, Inc. - VP & CFO [8]

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Yes, we've seen rates stay consistent for our 2018.

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Darren P. Lehrich, American Renal Associates Holdings, Inc. - SVP of Strategy & IR [9]

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As far as the outlook, Kevin, for our negotiations, our relations with payers remain good. We're not really seeing anything noteworthy to add in terms of the environment.

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [10]

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Yes, I'd agree with that.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [11]

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Okay. And then maybe just a last question. When you mentioned that the 6%, 6.5% normalized organic treatment growth number, I wasn't sure if you were saying that it should stay there in the medium term. I wasn't sure if you were saying this should also be the expectation for 2019 as well or whether you just kind of talking about 2018 guidance specifically?

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [12]

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Jason?

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Jason M. Boucher, American Renal Associates Holdings, Inc. - VP & CFO [13]

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Sure, yes. We're just talking specifically about 2018 guidance. We're still in the process of seeing how Q4 comes out and before we do anything for 2019. It'd just be too premature at this time to give any guidance.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [14]

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Okay. Well then, I guess at the risk of pushing that point, the -- you're going to open up, I guess, 7 to 12 sites in Q4. That's kind of similar to what you did last year. So in some ways, that's kind of like, I guess, a good start to 2019 volume growth. But if you did the same thing last year and you're still growing, call it 6%, this year, is there a reason to think that the growth rate could reaccelerate back to that upper single digits next year? Or is there any headwinds or tailwinds to that kind of thought process?

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [15]

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Kevin, I'm -- I'd let Darren to take this one.

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Darren P. Lehrich, American Renal Associates Holdings, Inc. - SVP of Strategy & IR [16]

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Sure. Hey, Kevin. So yes, I mean I don't think there's really anything more to add than what we've said. The outlook for our development pipeline remains very good. We actually had an increase to our signed deals. We are optimistic about the number that we'll add in the fourth quarter. I don't think we want to get into guidance for treatment volume for 2019, but we do have good visibility into our openings. And we also, as Syed mentioned in his prepared remarks, we had one acquisition subsequent to the end of the third quarter. So that is consistent with our pattern of having a couple of acquisitions each year, and those are more opportunistic.

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [17]

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And we also look forward to the independent certification process in 2019 because we do attribute some of our growth slowdown to new clinics with certification delays. Yes. Was that responsive, Kevin?

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [18]

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Yes, that was.

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Operator [19]

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Our next question comes in line with Patrick Feeley with Barclays.

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Patrick Thomas Feeley, Barclays Bank PLC, Research Division - Research Analyst [20]

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Just to follow up on the de novo point. Clearly, the pipeline looks strong. You picked up another 6 clinics. I'm just curious on the cadence for next year. When you guys think about guidance, and I know you don't want give guidance this early, but with sort of the heavy weighting at year-end that we've have seen in the last couple of years, is that the way we should be thinking about next year with sort of a back-end weighted cadence for openings? Does the changes in the certification process change the way we should think about that at all? So any comments there?

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [21]

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Yes. No, this is Joe, thanks for the question. I think that -- hey, look, we would prefer to open clinics along the whole year rather than have everybody else scurrying during the holiday season. And it did happen last year, and it's also occurring this year. We push very, very hard to open our clinics efficiently and on time and on budget. So we don't see any major changes in that regard. I think, as I said just earlier, we do look forward to independent certification. And we have run into some headwinds with construction. It's taken -- Syed is here, and he deals with that all the time. It takes a long time to get permits and get the construction completed more than we've seen in the past. But I don't think there's any fundamental change, for sure, going forward. And we'll -- we're looking at 15 to 20. We'll -- actually, Kevin mentioned, I think, 7 or 8 clinics. Well, I think we'll open 8 to 9 clinics in the quarter with the acquisition that we concluded after the -- after our announcement.

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Patrick Thomas Feeley, Barclays Bank PLC, Research Division - Research Analyst [22]

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Got it. And just one clarification on Mircera. So when you guys say that 2/3 of clinics now or around 2/3 are using Mircera as a primary ESA, is there a way to put that in terms of either percent of patients or percent of treatments? I'm just -- I'm not sure when you say 2/3 of clinics using this primary, does that mean those clinics are using it for 60% of their patients right now or using it for near 100% of their patients? Is there any way to kind of translate into the percentage of treatments that are on Mircera in the quarter?

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Darren P. Lehrich, American Renal Associates Holdings, Inc. - SVP of Strategy & IR [23]

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Patrick, we're going to let Don Williamson comment on it.

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Don E. Williamson, American Renal Associates Holdings, Inc. - Executive VP & COO [24]

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Yes, Patrick. I think when we say 2/3 of our clinics are converted to Mircera, typically, all of those patients within the clinic convert if that's the doctor's choice. And in most cases, that is true. So I think you could roughly say that 2/3 of the treatments are on Mircera.

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Patrick Thomas Feeley, Barclays Bank PLC, Research Division - Research Analyst [25]

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Great. And just one last thing. I believe earlier in the year, you're talking about benefit from Mircera being sort of low single-digit EBITDA to the year. Now that we're kind of approaching year-end, can -- is there any way you can update that number, quantify the impact of supply costs for the year?

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [26]

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That's a Darren question.

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Darren P. Lehrich, American Renal Associates Holdings, Inc. - SVP of Strategy & IR [27]

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Yes, Patrick. So I think what we said, just to clarify, low single dollar per treatment cost savings from Mircera. So that's something we're reconfirming. Our planning for Mircera turns out to be pretty on plan here. Where we are this year, we still expect to exit the year with about 85% to 90% of our physicians having adopted Mircera. And I'd say it certainly has been a benefit. We're calling out as it relates to the employee health benefit costs and the variance being approximately $3 year-to-date. If you sort of take that low single dollar benefit that we talked about, it's essentially being offset by, unfortunately, that trend.

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Operator [28]

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Our next question comes from the line of Steve Tanal with Goldman Sachs.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [29]

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I guess just looking at the nonacquired treatment trend, can you give us a sense for how sort of the same-store kind of underlying number trended versus your expectations and maybe the cadence of it, too? Just trying to understand if like we should sort of be thinking about this as maybe a lower growth rate going forward or if you think this is more of a little bit of a blip.

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [30]

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No, that's a great question. We look at nonacquired treatment growth in total. Because at American Renal, many times, we're opening satellite clinics. So if you look at a clinic same-store growth, it can be misleading. So our NAG is 5%. As you well know, the national average is 3.5%. But here again, we did have some slowdown with our openings due to certification -- largely due to certification, and we're going to be utilizing the independent accreditation firm in the year -- in the new year. And we just don't see any fundamental changes in our growth. I hope that's responsive to your question.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [31]

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Yes, it is, and it's helpful. The reason I ask that, one of the things that I feel like we're now noticing as we look at DaVita and your numbers as well like on a clinic basis, the trend in sort of treatments per day per center and so the level of that is actually lower this year versus last. And if you look at the year-on-years and kind of patients per center, a more meaningful step down in 3Q than you had in the first half, too. So I'm kind of feeling like there is a bit of a trend toward lower productivity per center. And I guess the question that stems from it is, do you think there is maybe too many clinics opening versus kind of current demand growth? Is that maybe part of what might be happening?

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [32]

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No, Steve, I don't think so. We look at utilization clinic by clinic every quarter, and we're planning out either an expansion to the extent we can do it or a satellite clinic. And so when you'd -- when I call it a satellite clinic, it's a fully operational clinic. But patients do choose to sometimes move from one clinic to the other clinic, so you'll see a reduction on that clinic. But in the total marketplace, it grows, which I think that's the way we look at it. So I don't see any fundamental change in how we look at utilization on a clinic-by-clinic basis or in what we plan for it to, like I said, either to build an expansion, which is a great use of CapEx, or a new clinic. So I'm going to turn it over to Darren for further color on that.

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Darren P. Lehrich, American Renal Associates Holdings, Inc. - SVP of Strategy & IR [33]

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Yes. No, the only thing I would add, Steve, is when you think about the delays in certification onto the extent that, that has an impact on the ramping, that could be part of what you're seeing in whatever calculation you're referring to. So those delays do create on sort of a cumulative bases an impact on how clinics ramp and become productive, and that's really what we had expected in the second half of the year that didn't materialize.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [34]

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Got it. Okay. That makes sense. And do you have a sense for what's driving the certification delays? It sounds like you maybe alluded to CMS kind of being backed up?

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [35]

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Yes. Well, it's just resources. It's industry-wide. It occurred in a number of different states, California, Texas, less significant delays. And I can tell you, we do everything we can to try to -- I mean we're always ready for the survey, but we do everything we can to encourage the surveyors to come to our clinic. But I think with this -- the independent firm that we've been in touch with and we work with, and hopefully, this will help us into 2019.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [36]

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Perfect. Okay. And then just switching topics for a second on Mircera. It sounds like the penetration levels are pretty consistent. So should we take that to mean that you're still sort of thinking about maybe an overall kind of blended low-single-digit dollar benefit to patient care costs this year? And maybe anything you could tell us about '19 as the Amgen contract sort of you move past that?

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Darren P. Lehrich, American Renal Associates Holdings, Inc. - SVP of Strategy & IR [37]

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I'll take that one, Steve. So yes, that's right. We're just confirming what we've said about 2018. And as we've said before, we'll see a continued benefit into 2019. We'll get more specific about that when we issue our guidance.

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Operator [38]

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(Operator Instructions) Our next question comes from the line of Ana Gupte with Leerink Partners.

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Anagha A. Gupte, Leerink Partners LLC, Research Division - MD of Healthcare Services & Senior Research Analyst [39]

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Following up on that question around commercial mix. Exchanges, obviously, are out now. But on the out-of-network side, what types of conversations are you having with the Aetna -- with an Aetna or an Anthem or any other blue player and so on, on moving from out-of-network to in-network? Can you give us some specific thoughts whether you're seeing a push there, just like United?

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [40]

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Let me just start by saying that we have good relationships with our payers. I'm going to turn it over to Jason.

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Jason M. Boucher, American Renal Associates Holdings, Inc. - VP & CFO [41]

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Sure. Thanks for the question. We don't go specific on any insurer. What we do, do, is we look what's best on a national state or a local area when it comes to contracting, and we go about it that way. So it's on a case-by-case basis on when we negotiate with providers.

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Anagha A. Gupte, Leerink Partners LLC, Research Division - MD of Healthcare Services & Senior Research Analyst [42]

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Yes. But on kind of a -- on a blinded basis, do you see that becoming a pressure point at all ongoing from an out of network to in contract?

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Darren P. Lehrich, American Renal Associates Holdings, Inc. - SVP of Strategy & IR [43]

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Well, Ana, we've commented on the one large payer. And clearly, that's had an impact on rate. That was about a $3 per treatment impact in the third quarter, and that will have 2 additional months in the fourth quarter. Beyond that, I don't think we're seeing anything unusual, and we wouldn't want to comment about any specific payers either.

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [44]

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And I think the stability over the last 4 quarters have been very encouraging.

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Anagha A. Gupte, Leerink Partners LLC, Research Division - MD of Healthcare Services & Senior Research Analyst [45]

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Okay. Okay. So no pressure from mix. You think that it's very much stable. But maybe I could just talk about the broader margin outlook, not necessarily 2019, but any color there is also helpful. I mean you used to run at mid to -- the EBITDA less NCI margins were substantially higher when we -- when you finally -- when you went public. Exchanges, obviously, were a piece of it, and that's now out. You're saying the commercial mix is stable. Otherwise from a contracting perspective, you're seeing a bit of a nice pop in Medicare next year. Calcimimetics should continue a little bit. And then on the cost side, you have at least annualization of Mircera, and the ramp on the ones that have already converted. You should be seeing OpEx leverage, and I don't know, perhaps volumes in existing clinic capacity and utilization in existing clinics, labor cost, et cetera. I mean is this likely to be your margin going forward? Is it going to be flat? Do you think it will compress further across all those factors? Or will it even have potential to normalize upward partway at least to where you were?

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Jason M. Boucher, American Renal Associates Holdings, Inc. - VP & CFO [46]

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Sure. Thanks, Ana, for the question. We're not giving an outlook right now on 2019 margins. But just some things to keep in mind, I'd say some good guys as we move forward would be treatment growth, decrease in drug costs. We do have the pickup of the Medicare rate in 2019. Now that we're in network, I think we have an opportunity to increase our commercial mix overall. So some bad guys maybe moving forward is we'll have a full year of in-network with that large provider. We continue to see our PD expenses grow. And then our labor cost growth, we assumed 2% in 2018, and that might be slightly higher moving forward. But again, at this time, it'd be too premature to give guidance on 2019.

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [47]

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Thanks, Jason. Was that responsive, Ana?

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Anagha A. Gupte, Leerink Partners LLC, Research Division - MD of Healthcare Services & Senior Research Analyst [48]

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I guess just beyond 2019, do you see the good guys outweighing the bad guys as you stabilize? And where will you net out on a normalized basis?

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [49]

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Yes, look, I think that the company executes quite well. We have a very stable labor force. Our voluntary turnover rate is -- remains stable and very low. Our management team is executing. We talked about our 2017 initiatives around the personnel area that we continue to execute quite well. Syed has done a tremendous job there. So -- and we've got sufficient interest from physician partners to continue to grow. As we indicated, we have 30 signed deals, which is higher than last quarter. So we look -- we feel pretty good, but we just -- I think it's just premature to get into 2019 at this stage.

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Anagha A. Gupte, Leerink Partners LLC, Research Division - MD of Healthcare Services & Senior Research Analyst [50]

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Okay. And I know -- I guess one final one. When you look at your existing clinics, and there's always a big focus on de novos and then doing the deals, but in terms of capacity utilization in your existing clinics, is there any opportunity to optimize that better and maybe squeeze more out of your existing assets that would help you with your margins?

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [51]

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Yes. No, like what I have said -- I think Steve had that question earlier. I -- we look at our capacity on a clinic-by-clinic basis every single quarter. And next to each clinic, we look at the opportunity to either expand that unit, which is a great use of CapEx, or build another clinic. So I think we run very efficiently and also remain focused on good, quality care for patients. And our quality metrics are good, too. So look, I think that we've got an amazingly deep group of people and management here at American Renal that understand what they're doing to provide excellent care efficiently, and that's what we'll continue to do.

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Operator [52]

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Mr. Carlucci, there are no further questions. At this time, I'll turn the floor back to you for any final comments.

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Joseph A. Carlucci, American Renal Associates Holdings, Inc. - Co-Founder, CEO & Chairman [53]

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Thank you, operator. Thanks again to everyone for taking the time to join us this morning and also for your interest in American Renal. I do want to thank our staff members that are veterans in honor of Veterans Day on Sunday, November 11 and all of the other veterans across the country.

So thank you very much, and we look forward to talking to you next quarter. And again, appreciate your interest at American Renal. Have a great day.

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Operator [54]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.