Q1 2021 DaVita Inc Earnings Call
Good evening My name is Sheila and I will be your conference facilitator today.
This time I would like to welcome everyone to the Davita first quarter 2021 earnings call.
And ladies have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period.
The question during this time simply press star and FIC.
One on your telephone keypad, if you would like to withdraw your question Chris.
Thank you.
Mr. Gustafson, you may begin your conference.
Thank you and welcome everyone to our first quarter Conference call. We appreciate your continued interest and our company I'm, Jim Gustafson, Vice President of Investor Relations and joining me today are of Javier Rodriguez, our CEO and Joel Ackerman. Our CFO. Please note that during this call. We may make forward looking statements within the meaning of federal.
The securities laws.
And all of these statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described and the forward looking statements for further details concerning these risks and uncertainties. Please refer to our first quarter earnings press release, and our SEC filings, including our most recent annual report on form 10-K and subsequent quarters.
And the report on form 10-Q, and any subsequent filings we may make with the SEC are forward looking statements are based upon the information currently available to us and we do not intend and undertake no duty to update those statements except as may be required by law. Additionally, we'd like to remind you that during this call we will discuss the non-GAAP financial measure.
A reconciliation of these non-GAAP measures and the most comparable GAAP financial measures is included in our earnings press release submitted to the SEC and available on our website I will now turn the call over to Javier Rodriguez.
Thank you Jim and good afternoon.
Over the last several months, we have made incredible progress and our efforts to combat the COVID-19 pandemic and it's with continued optimism that I provide several updates today, starting with vaccination followed by a summary of the first quarter performance and an update on our improved outlook for the year and finally.
And overview of our ongoing commitment to ESG.
Q1, and brought a lot of smiles and the kidney care community administered hundreds of thousands of vaccines towards the patient.
Providers worked closely with the by the administration, the CDC and state government for the dialysis patients could be vaccinated, and a trusted and convenient side of care.
We knew that this would help our patient and overcome transportation and other access challenges getting to third party sites and we had confidence that the.
Hesitancy rate would decline when they received education from a trusted share taker.
Thanks to all of the hard work by our teams and the government partners I'm proud to say that as of yesterday, 72% of our patients nationwide have received at least one vaccine dose.
We also saw an opportunity to positively impact health equity by administering the COVID-19 vaccine and our clinic.
Similar to the early results and the broader U S population and the first few weeks of the vaccine rollout we saw the vaccination rates for black and Hispanic where approximately 40% below that of white and Asia and Americas.
This did not fit well with us.
The work and mobilize our care teams, including social workers Dietitians and medical directors to have one on one conversations with patients to address the common causes hesitancy.
And at the panic patients have now been vaccinated at nearly the same rate as the white patients and the GAAP for a black patients has been reduced the 10%.
We are not done our pursuit for help the equity continues.
Onto our first quarter financial results, we delivered solid performance in Q1 as our operating margins returned to 15, 7% in the quarter. While we continued to lead through the continued challenges presented by the pandemic.
And we covered on our last call treatment volume declined in Q1 of our treatments per day, and a low point and mid February including the impact of approximately 25000 mid treatment from the winter storm.
Since then our daily treatment trends have steadily improved.
The trends continue absent any further infection and surgery, we believe that our sequential patient census growth through the end of the year could return to pre COVID-19 levels, which is what we incorporated in our guidance ranges, we provided last quarter.
Let me provide a bit more detail and volume that supports our outlook first since our update in Q1, COVID-19 cases accounts and new infections within our dialysis population have continued to decline as of last Friday. The number of active cases, amongst our patient and across the country decrease of approximately 85% from peak.
On January six 2021, and the last seven day incidence rates for new cases decrease of approximately 91% from the week ending January nine 2021.
And we're grateful that we are seeing a dramatic decline and the mortality rate associated with COVID-19.
Previously shared that the unfortunate incremental mortality associated of COVID-19 with approximately 7000 in 2020 in 2021, both of our patient mortality accounts and mortality account and the general population peaked in January and the first quarter incremental mortality associated with COVID-19 for the.
From a 3300 lives with more than half of that number of occurring in January and decreasing to approximately 600 and March it is two.
Too early to provide an estimate for April but we expect the results will improve versus March.
Shifting the full year outlook, our view of core operation performance for the year remains largely unchanged from our original guidance. However, now that the likelihood of some downside scenarios has decreased due to the trends I. Previously mentioned, we are increasing our adjusted earnings per share guidance range to $8.
The $9 per share and our adjusted operating income guidance range, the 175 billion to $1 875 billion at.
At the midpoint of our revised adjusted operating income guidance. This would represent approximately of 4% growth year over year.
And these revised ranges assumes no further major disruption from the virus strength.
And my final topic is our ongoing commitment to environmental social and governance matters or ESG ESG has become a more significant topic of conversation and the investment community over the last couple of years, but these are not new areas of focus for us the davita our beliefs are incorporated into our <unk>.
Stated vision of social responsibility. It has three components caring for a patient caring for each other and caring for the world around it including both our communities and our environment Davita.
And the media continued to execute against this vision, providing top quality clinical care for a patient is at the core of what we do and because of already spoken at length about our patient care and our efforts to vaccinated patients I would like to highlight a few of our achievements and caring for our teammates and caring for the world around debt.
I believe the posture of an environment rich and diversity and while we all feel that we've alone is imperative to our culture and how we connect with each other and how we connect with our patients every day and our commitment to cultivating diversity is evident throughout the organization. It starts with the board of directors currently made up of nine liters of.
And 67% are diverse including for women and three people of color. The diversity of our team extends to the leaders who run the core operations and our clinics from <unk>.
52% are female and 27% are people of color are.
These results have been achieved through thoughtful and deliberate practices to create a diverse pipeline of talent.
And 2021, we published our first report on diversity and belonging disclosing many of our companies diverse metric and our ongoing efforts to cultivate a diverse organization and of which everyone feels that he or she along.
We also recently published our 14th annual corporate Social responsibility report and our first ESG report. These reports disclosed the progress we made in 2020 and layout of our ambitious ESG goals for 2025, including the goals to reduce carbon emissions by 50% to have vendors.
Representing 70% of the mission set climate change goals and to achieve engagement scores of 84% of our higher among our teammate population.
We are pleased with our progress to date on diversity and ESG and as you can see by our goals. We have a lot more we hope to accomplish.
With that I will turn the call over to Joe.
Thanks, Javier Q1 was the strong start for the year with solid financial performance for the quarter. We reported revenue of approximately $2 8 billion operating income of $443 million and earnings per share of $2 nine.
As Javier referenced treatment volume was the large headwind and our non acquired growth was negative two 2% compared to negative 3% in Q4.
While COVID-19 presented the main challenge to Nag and Q1 winter storms, particularly Yuri were responsible for about 30 basis points of the NAV decline.
Treatments per day bottomed out during the first quarter. So we expect to start seeing quarter over quarter growth and Q2.
We continue to expect that <unk> will be negative for the year, although we expect to see and acceleration of Nag and 2022 and 2023 as mortality rates may be lower than the pre COVID-19 levels for a few years.
U S dialysis revenue per treatment grew sequentially by almost $3. This quarter as the result of the Medicare rate increase higher enrollment in MA plans of slight improvement and commercial mix and higher volume from our hospital services business.
Partially offset by the seasonal impact of coinsurance and deductibles.
Dialysis patient care costs declined sequentially by approximately $6 per treatment.
Although we continue to experience elevated costs due to the pandemic, such as higher PPE and certain clinical level expenses from the.
Continued it and infection control protocols.
Our Q1 patient care costs included of nearly $2 per treatment benefit from our power purchase agreement of benefit that we do not expect to persist through the rest of the year.
For the quarter, the net headwind related to COVID-19 was approximately $35 million.
Consisting primarily of higher PPE costs, and the compounding effects of patient mortality associated with COVID-19.
Partially offset by the benefit from the sequestration suspension with a number of other items that largely offset each other.
For fiscal year 2021, we now estimate the net negative impact from COVID-19 to be approximately $50 million lower than our guidance last quarter.
This is the result of lower COVID-19 impact in Q1, the recently passed the extension of the Medicare sequestration relief through the end of the year and lower other offsets, including <unk> in the back half of the year at the middle of our guidance range. This would equate to $150 million.
Negative impact from COVID-19 and 2021.
Our DSO increased by approximately seven days in Q1 versus Q4, primarily due to temporary billing holds related to the winter storms and the changes and <unk> reimbursement in certain circumstances, we hold claim to make sure we are complete and accurate charging.
Information for payments.
And this quarter, we had more of these holes and the single largest driver was related to winter storm, Yuri which impacted more than 600 of our centers and fell right in the middle of the quarter.
This has the effect of pushing a significant amount of cash flow from this quarter to the next and cause the corresponding DSO increase and the interim.
While claim the hold shipped cash flow between quarters, they have no negative the impact and what we ultimately expect to collect.
Already seen a significant increase in cash collections in April and expect the corresponding positive impact on both cash flow and dsos over the next two quarters.
A couple of final points and the first quarter, we repurchased two 9 million shares of our common stock and to date in April we repurchased approximately 1 million additional shares.
Debt expense was $67 million for the quarter and you expect quarterly debt expense to increase to approximately $75 million beginning next quarter as the result of the $1 billion.
Of note issued in late February.
Before we open up the line for Q&A, let me share some reflection over the past year, our teams and our business experienced unusual volatility and challenges due to the pandemic.
We have whether this very difficult period, because of our dedication of our people our scale and innovation and our holistic platform and approach to patient care.
And as I look forward, our organization and stronger relationships with patients of deepen.
And have even more resolve and our comprehensive kidney care platform is well positioned to deliver a best in class value proposition for a patient.
<unk> and hospitals and payer partners now.
Now, let's open it up for Q&A.
Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star one on mute your phones and record your name clearly if you need to withdraw your question press the Star Q again to ask a question. Please press star one.
Our first question will come from Peter Chickering with Deutsche Bank. Your line is open.
Good afternoon, guys and thanks for taking my questions.
The first one is on the operating income guidance you know like you raised it by three 9% of about $63 million at the midpoint and you talked about some of the gives and takes of sequestration and lower impact from COVID-19 and lower for.
Of course, and the back half of the year can you sort of help us quantify which you know what are the drivers of those.
Sure Hello, Peto, it's Joel here, so I would think about.
The three things really.
And we beat this quarter. So obviously that helps with the full year sequestration was the biggest driver here and that's about $50 million and then looking towards the back half of the year, we've taken down some of the COVID-19 offsets that we were expecting from G&A.
And and TNT has things get a little bit better.
We were not expecting as much offset in Q3 and Q4, so you put that altogether and that's where you wind up.
Okay, and then the trading growth declined one 3% sequentially and two of 2% of year over year I understand there are a lot of missed treatments from hospitalization and from the storms are offset by your acute business.
And obviously the the mortality issue with that being said is there any chance you can give us monthly treatments during the quarter and through April will just help us understand the pace of recovery and how you plan to get back to patient census to pre COVID-19 levels by the end of the year.
Yeah, Peter I. Appreciate the question, we're not going to give monthly, but let me try and help out a little bit of February was the bottom and.
And that was.
Driven largely by the mortality issue, but also.
Yuri the storm.
<unk> and about 25000 missed treatments, we saw recovery in March.
Both <expletive>.
Has the mortality issue got better as well as the recovery after the storm and then April trended a little better from there as well I think it's a little early to quantify it and try and.
Use the number of draw a trend line. These numbers can bounce around a bit so that's where we are.
And the last question the.
<unk>.
Our revenue per day.
Maybe it was pretty strong with all of the items you laid out. So two quick questions. The first is how much did copay pressure did you see in the first quarter. So it would be a good assumption for revenue per treatment and <unk> and as you look forward for the next couple of years is that the reason why of 2% revenue per treatment growth wouldn't be the right assumption to make.
Yes so.
A couple of things I'd highlight about Q1 RPT the in terms of quantifying the coinsurance and deductible that's somewhere in the five to $6 of treatment range. So you'd add that to what you would expect to see in in Q2, We also had a pickup.
In Q1 over Q4, as a result of calcium and medics I'll remind you cosmetics Oi in 2021 will be similar to 2020, but the seasonal pattern will be very different. So we picked up $2 of about $2 of RPT and Q1 over Q4 from that in <unk>.
<unk> of looking forward about what <unk> will look like we've moved away from from guiding on RPT is as you'll remember.
In terms of what's a reasonable number as 2% reasonable I wouldn't say, it's unreasonable but.
It might be.
It might be a little on the high end of of the range that I'd, probably think about but.
We'll have more to say on the 2020 to RPT, obviously later in the year.
Thanks, so much.
And.
Thank you.
And I'm, sorry, operator, Vito just just to jump in on that debt that my comment obviously you'd have to adjust for sequestration, which would go away.
Presumably between 'twenty, two and 'twenty, one and that would be a big number yep Yep Yep of course is more so just excluding sequestration the gives and takes with Dan and the overall market demand is shifting from a you know what.
For the 2% reasonable.
Exactly.
Thank you. Our next question will come from Kevin Fischbeck with Bank of America. Your line is open.
Great. Thanks.
Maybe it's the the down.
And the opportunity for a second.
And.
And is it fair to say that when you listed the things that flow.
RPT and the quarter they were listed and the order of importance at the rate update with the biggest one.
There I would say there are for things and they're roughly all of about the same order of magnitude and thats the Medicare rate update calcium of med ex the.
The mix changes in the <unk>.
Commercial mix change and then the MAA, they're roughly in the same order of magnitude.
Okay, that's helpful and.
And then.
I guess.
When we think about.
The improvement in and volume that you expect to see at the.
Good day.
John.
Should we think about that some of the mix perspective is that is that and volume improvement.
Proportionately of commercial improvement and does that yeah.
Have any implications for margins of profit.
Yeah. So I'd say the likelihood is that the mix will be more Medicare than commercial remember the the mortality we've seen as a result of COVID-19 was disproportionate in the older population as you would.
Expect and our older population is disproportionately Medicare so as.
As you see the unwind happened from COVID-19 over the next ex number of years, we think that would lead to a lower kind of our commercial mix trending down a bit in terms of the implications for margins. There is an offset to that recognizing that the these new.
<unk> will be filling unused capacity and that would have a tendency to drive margins up and how those to those countervailing forces play for remains to be seen and and it's a it's a tough number to predict it's dependent on a lot of the the some of the underlying.
<unk>.
Okay. That's helpful and I guess it wasn't the hundreds of clear to me.
What you were saying as far as you appreciate the guidance.
And you said you took down some of the COVID-19 offsets of that.
Basically, saying that you were prepared for things to get worse and you add cost.
Cost cuts all lined up and now that things are coming and better you don't feel the need to push that.
And as much of that no I think of.
Our T and he is down and it's been down since the beginning of COVID-19 as teammates travel less and we had modeled that continuing through the end of the year and now we think for example that <unk> and Q3 and Q4 could return closer to pre COVID-19 levels. So the offset the benefit we got for.
From lower <unk> is probably going to be less than we anticipated.
Okay. That's helpful and then I guess the last question.
And given update on your on your contracting outlook for Medicare advantage.
Are there any large books of business that are up for renewal next year and how are things going as far as you know rates and you know.
Conversations around and going to more value based.
Models.
Yeah, Kevin This Javier how are you. Thanks for the question, let me just start off by saying that.
There is no.
Spike or change and volume of renewals or anything like that its and its normal cycle.
And the conversations continue to be highly highly aligned and trying to make sure that we add more value to the patients and helping the.
And.
And their care continuum so.
And the fact that we're doing more complicated contracts instead of a fee for service.
Means that it takes longer.
So as it relates to that there is nothing sort of they're there to talk about because the outlook is kind of unchanged and it's incorporated in our guidance.
Alright. Thanks.
Thank you once again, if you would like to ask a question at this time you can press star one on your phone and Marine Corps.
And when prompted.
Our next question will come from Justin Lake with Wolfe Research. Your line is open.
Thanks, Good afternoon, and a few questions here first.
In terms of the you know the guidance change it looks like you talked about things getting a little bit better on the.
Of the COVID-19 fraud.
You said $50 million.
And when you net it all together and that's the.
Basically we just took off.
When you took the guide by so does that imply that the you know the first quarter book better than my model and I think rather than consensus of does that mean that the quarter was actually kind of in line with your views or was the first quarter kind of materially better for them and O y perspective.
Yeah, I'd say Justin the the.
The Q1 was was.
Within the range of what we were expecting I would say a little bit on the positive side, but it's but it's early in the year to start tinkering with our full year guidance and our full year forecast so.
Despite what I would characterize as a strong quarter, we chose to keep things in line.
Okay, and then the the $150 million I think you sort of draw was the.
Was the debt COVID-19 headwinds.
Correct first of all year.
And before you go so but it looks like that has a bunch of different components right by you know if I think about it there's COVID-19 costs.
Alright.
Part of it there is due to the negative impact of treatments. Then there is the benefit of sequestration, which it sounds like you've put in there and then there's some cost offsets.
I'm just trying to think about is there any way to help us understand those four buckets.
Yeah, so yeah.
You've got it right and I think it ultimately it's a pretty simple calculation you take the excess cost associated with PPE.
And that roughly offsets with sequestration and.
And then everything else is a wash and what your result.
And is basically the negative impact of mortality, which is in that $150 million range.
So there are a lot of moving pieces, but net net they mostly cancel out and leave you with the impact of mortality.
Okay, and then as you think about the impact of mortality.
Obviously to your point.
We probably saw a bottom and the fourth and the first quarter and things are expected to get better through the year. So I'm just trying to think about the pace of that larger and 50 right because of the exit rate is going to be important coming out of fourth quarter. The.
Think about the impact on next year.
So can you help us think about that in terms of you know where where do you think that impact is and this quarter and where do you think that impact will be kind of in the fourth quarter.
Yes. So this stuff gets pretty technical pretty quickly, but let me try and help you out I think the way I would I would think about it took to simplify it as you start with what are typical nag is and if you want to grab the number go back pre COVID-19.
And pick something and the low twos to 2% something like that and.
And you really see that impacted by any continued excess mortality, but again, we think thats declining rapidly you'll probably see some in Q2, but going down quickly again, assuming COVID-19 plays out the way, we expect and it and it's on its way out.
But obviously things could be different so start with nag and excess mortality then adjust for.
What could be a challenge to the to the pipeline. If you want to assume theres any CK D for impact we don't have data on that but if we look at what what we see in terms of new admit we don't see any impact there that we don't see any impact from that right now, but you'd have.
The incorporate that and then we see a tailwind coming up as patients who otherwise would have died and the next quarter or two passed away as the result of COVID-19 and that's a hard one to measure so that's how I'd model. It if you want to get.
And kind of simplistic and I realize I'm throwing a lot of numbers and a complicated story of two I think you're speaking with.
For the extra add back the tailwind associated with lower mortality post COVID-19 and and that's how you start modeling what what nag looks like going forward.
Alright, I'll I'm not smart enough of a figure that out, but we'll talk about the loss of lives just last question the.
The can you can you give us the commercial mix change from kind of a you know what you were looking at and the fourth quarter kind of into the first quarter here.
It went up a small amount and not not not much but it was up a little bit.
Alright, thanks, guys.
Our next question will come from Peter Chickering with Deutsche Bank. Your line is open.
Hey, Thanks for taking my follow up questions a couple of quick ones here.
It's been a pretty fun few years from a share repurchase perspective, I'm just curious what we should think about as the right.
Our leverage ratio for the business at this point and kind of where should we deploy the rest of that and to share repo of.
And because of the around 3.5 at this point is one of them just kind of feeling for how we should think of that leverage ratios versus share repo.
Yeah. So look I think we've been pretty consistent on this and nothing has really changed we want to be in that three to three and a half times, where we're at 339 right now we did of $1 billion bond deal during the quarter cash flow for the rest of the year is likely to be relatively.
Strong you saw of cash flow and Q1 was weak and we think we'll make that up over the course of the year, but no reason to think or our philosophy and approach to leverage ratio and buybacks is going to change over the near future.
That's.
The second one is a quick one what was the percentage of your Medicare advantage penetration this year versus last year.
Well, we disclosed last time is our expectation is in line. What we said was a mid to high of 30% and markets roughly around 43%. So.
And so we're slightly below.
The rest of the market is still in the mid to high Thirty's.
Okay.
I've sort of you know.
What percentage of patients were treated and the home this quarter and if you see that accelerating sort of in this post COVID-19 environment.
And the percentage hasn't changed much because with the net decreasing but that segment of our business did increase and particular PD PD grew around 4%.
The home hemo dialysis the.
A.
Part of it decreased but net net.
That's the segment of the business and continues to grow we think that there is appetite from the physician community and the patients to have more flexibility and freedom and we are innovating and creating a lot of technology. So that the patients feel more comfortable and more confident and more convenient being connected.
Debt to our care site. So we do expect that the modalities will continue to grow okay. Great. Thanks, So much guys.
Yeah.
Thank you.
Showing no further questions at this time.
Okay, well hopefully the short means that it was a pretty clear let me just say some closing comments.
Q1, 2021, and my mind, and and my heart and and many of our caregivers will always be remembered and come with a lot of fulfillment for back cement vaccinating literally tens of thousands of patients and many instances not being dramatic overstating it literally life sustaining.
And so.
Second quarter financials of pretty straightforward and pending of shift and the virus.
And we began a path toward our historical normalization.
And then lastly, our team's continued unwavering commitment.
Towards caring and innovating to improve the lives of our patient and thank you for Orange and for your interest and Davita and we look forward to talking to you soon stay safe.
Thank you that does conclude today's conference for thank you for participating you may disconnect at this time.