Q1 2022 DaVita Inc Earnings Call
Good evening My name is Misty and I'll be your conference facilitator today at this time I'd like to welcome everyone to the Davita first quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer period, if you'd like to ask a question. During this time.
Simply press Star then the number one on your telephone keypad, if you'd like to withdraw your question Press Star then the number two thank you. Mr. Ackerman you may begin your conference.
Thank you and welcome everyone to our first quarter Conference call. We appreciate your continued interest in our company I'm, Joel Ackerman, CFO and Treasurer and joining me today is Javier Rodriguez our CEO .
Please note that during this call we may make forward looking statements within the meaning of the federal Securities laws. All of these 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 first quarter earnings press release, and our SEC filings, including our most recent annual report on Form 10-K, and all subsequent quarterly reports on Form 10-Q, and other subsequent filings that we make with the SEC.
Our forward looking statements are based on information currently available to us and we do not intend and undertake no duty to update these statements except as may be required by law.
Additionally, we'd like to remind you that during this call we will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release furnished to the SEC and available on our website I will now turn the call over to Javier Rodriguez.
Yes.
Thank you Joe and thank you all for joining the call today.
It is an interesting time right now as our country and our world are facing a unique portfolio of one time events all happening at the same time.
On the positive side, we're gathering and interacting Morris communities and our society as Covid infection rates have declined.
The more challenging side, we're dealing with new economic pressures of inflation supply chain constraints and the sad consequences from the war between Russia and Ukraine.
As our organization worked through these challenges I think it is critical to keep in mind why davita exists.
We are a patient focused organization that provides life sustaining care to over 240000 people in 12 countries, which is why I want to start the call by sharing our clinical highlights.
As you know one of our key focus areas has been improving a patients experience in dealing with their kidney disease.
And one way to do this through focused efforts to reduce the amount of time they are patient spend in the hospital.
With our new integrated care partnerships, we've been scaling our models of care and are seeing early results.
Digit percentage reduction in time spent in the hospital, which is absolutely great for our patients and for the health care system.
These results are in line with our expectations. The improvement is primarily driven by our care management, our clinical interventions.
And our focus on the quality of care of our patients.
Fewer hospitalizations translates into better quality of life for our patients and more healthy days at home doing the things that they like with the people. They love. We are optimistic about these early results and we will continue to find ways to improve our patient's quality of life.
Now, let me transition to our first quarter performance in Q1, we delivered operating income of 338 million and earnings per share of $1 61.
Operating income was down sequentially, primarily due to typical seasonal factors continued volume pressure from COVID-19 and higher wage expenses.
Mortality rate of army crop variant of Covid has been significantly lower than prior parents, but the sheer magnitude of cases resulted in estimated excess patient mortality of approximately 2100 in the first quarter.
Therefore, our treatment volumes declined compared to the prior quarter.
Good news is the patient infections and mortality rates have declined over the last couple of months consistent with national trends and we have not yet seen significant impact from new variance. Therefore, we're beginning to see positive trends in treatment volume in both March and April .
On staffing as we've discussed previously we continue to experience a challenging labor market.
Year over year, our first quarter field labor expense increased over 6%. The increase was due to a mix of higher than normal merit increases higher incentive pay increased utilization of contract labor and lower productivity due primarily due to higher training costs and inefficient staffing associated with coal.
Hoarding COVID-19 patients.
While we're seeing some positive trends in our ability to fill open roles in our clinics, we expect to experience higher than normal year over year labor cost increases for all of 2022.
With all of these challenges we believe it's more likely that our performance will fall within the bottom half of our guidance range for 2022.
However, there are scenarios in which our results could be above or below this due to the uncertainty of the environmental impact of labor costs and.
Covid.
Looking forward to 2023 and beyond we're preparing for wage rate growth to continue above average historical levels to offset this impact we will need to demonstrate continuous cost innovation. We have already identified a number of cost savings opportunities to help mitigate these inflationary pressures.
These include savings from our new Esa contract G&A efficiencies capacity utilization improvement clinical operation optimization.
And procurement improvements, we expect to start realizing the savings in 2023 with a full run rate benefit in 2025.
We believe that these anticipated savings combined with an expectation of higher rate increases from government and private payers in the future can keep us on a path to deliver on our long term adjusted operating income growth of three 7% and adjusted earnings per share growth of 8% to 14%.
I'll wrap up my prepared remarks, with some thoughts on our integrated kidney care or eye Casey business as we shared in our capital markets day, we continue to see significant potential or I Casey business.
Burst delegated patient volumes are strong and consistent with our initial modeling with some potential upside over the next 12 months. We are on track with our expected yesterday, the member growth via new payer partnerships and we are trending ahead of plan on new CK D payer partnerships as payers recognize.
Our ability to effectively collaborate with physicians on managing this patient population.
Second <unk>.
Available cost savings may be higher than initially forecasted given strong nephrologists engagement and from their recent released 2023 M. A rate increase of approximately 10%.
Third we have expanded the number of Nephrologists with whom we are working with and value based care for.
We're now engaged in a new value based partnership with over 1800 neurologists around the country with more than 600, Nephrologists using an integrated CK D Electronic Health Records.
Last we continue to have confidence in our clinical model, which is now beginning to operate at scale.
With that I will turn it over to Joe to discuss our financial performance and outlook in greater detail.
Thanks, Javier first let me start with some additional details on our first quarter results. The biggest driver of the operating income decline of approximately $50 million from Q4 with seasonal factors first there were two fewer treatment days, resulting in.
<unk> 185000 fewer treatments in Q1 second there is negative seasonal impacts on revenue from higher patient coinsurance and deductibles.
Third payroll tax expenses are higher in Q1.
Now moving on to the underlying drivers of operating income.
U S dialysis treatments per day were down approximately 2004% to 2% in Q1 2022 compared to Q4 2021, primarily due to excess mortality from Covid in late Q4, and in Q1 higher missed treatment rates in Q1 from the <unk>.
<unk> added to the negative impact on treatments.
Revenue per treatment was down quarter over quarter by approximately 35.
Primarily due to that impact of higher seasonal coinsurance, and deductibles largely offset by increases in the Medicare fee for service rates for 2022 and continued improvement in both MAA and commercial mix.
Patient care cost per treatment was up $4 49 per treatment quarter over quarter, primarily due to higher wage rates and the impact of lower treatment volume on fixed expenses in our centers.
G&A expenses were down approximately $26 million quarter over quarter, largely due to the seasonality of our G&A spend.
Our Q1 operating loss for the <unk> business was in line with our expectations as we continue to invest in growth. We remain on track for the incremental $50 million investment in our <unk> business for the year.
In Q1, we repurchased two 1 million shares of our stock and we've repurchased to date, an additional 800000 shares since the quarter end.
Looking forward to the rest of 2022 in Q2, we anticipate a rebound in operating income as the Q1 seasonal factors fall away, partially offset by the reduction and then the full elimination in Q3 and Q4 of sequestration relief.
In Q3, we expect to incur the vast majority of the impact from valid costs. Finally, Q4 will increase sequentially with significantly fewer ballot related costs.
Now onto our views for 2023 as we shared in our capital markets day, we considered 2022 to be a transition year, we expect to see a rebound in our operating income in 2023, driven by growth in the core business a reversal of some of the Covid headwinds.
No contribution to the industry's fight against ballot initiatives in California, and progress in our <unk> business.
And our capital markets day, we sized this operating income rebound from 'twenty two to 'twenty three between 250 and $400 million.
Our updated view on 2023 revolves around three of the underlying drivers.
22, 2023 and potentially into 2024.
<unk> these nonrecurring expenses better guidance.
Finally uncoated.
Our inability to predict the course of the pandemic remains a source of significant variability in our forecasts.
Our views of 2023 of capital markets day assume the scenario in which the excess mortality from Covid would be negligible and we would experience accelerated growth beginning in 2023.
As heavier mentioned, although we have seen improvements in treatment volumes recently.
We remain cautious about future searches.
If we continue to see searches this year and of Covid mortality continue if the disease remains endemic the impact of Covid on our forecast could slip from a tailwind to a headwind in 2023.
Putting this all together, while it's still early to give full guidance for 2023, particularly given the dynamic environment. We currently believe that of Covid largely subsides as a source of increased mortality. This year, we feel good about the range of 250 to 400 million dollar O L. I N.
<unk> 2022.
Covid remains a headwind this year and into 2023, we would still expect a strong rebound but are not in a position to quantify it given the uncertainty <unk>.
Operator, please open the call for two and a.
Yes, Sir if you would like to ask a question over the phone again, that's star followed by one place and make sure I got phone is unlimited and that card. Your name clearly when prompted if you wish to the try your question you can press Dark Hill.
Our first question comes from Kevin <unk>, Let's Bank of America. Your line is open.
Alright, great. Thanks.
When it comes to Q1, you missed the consensus estimates by a decent amount, but you're.
Kind of reaffirming the guy who has to live under the guidance.
It's kind of apply to the rest of the year is gonna play out the way you thought even though it sounds like he's caused <unk> help until.
Next year, just trying to figure out why the pressure in Q1 isn't going to hurt.
Hurt the back half of the are the same way it hurt Q1.
Yeah, Kevin. So Q1 was really dominated by two seasonal impact totaled about $60 million a pressure on O Y one relates to treatment days there were two fewer treatment days during the quarter and the second and that's about half the impact and.
The second one is about the seasonal patterns related to co insurance deductible and that's worth about another $30 million. So if you back those things out there there are a bunch of other things that that played through in the quarter that will kind of be puts and takes for the rest of the year, but you.
Back out that seasonality and I think that explains most of the delta.
I guess I guess, maybe that would ask the question is the Q1 come in the way that you thought it was because I was too or a seasonal things that you would've known as it just the street didn't model those things correctly is that what you're saying or.
I'd say, that's the bigger piece, but Q1 was behind where we expected and it was mostly around volume.
Mortality.
Ality was higher than we expected and while we don't we're not changing our view on mortality for the full year. It came in earlier than expected and the mistreatment rate was higher than expected Q1 is typically a higher mistreatment right quarter because of flu seasonality, but it was even higher than we would have thought.
And that's largely due to COVID-19.
Okay, and then I guess to the to the point about the right.
Opportunity over the next few years to.
Offset these costs yeah, how how is the commercial environment. I mean, you guys have talked about relatively low net right updates.
Historically, and so that leaves me wondering whether you feel like you really do have the bargaining power with commercial overtime B, how do you feel about that ability that that when wages when they place it's going up you do have that power or.
Shall we still think about you know.
<unk> R. R overall rate growth, probably being something less than.
What you think cost growth will be even though it will start to catch up.
Yeah actually having this javier but thanks for the question.
The short answer is it's too early to tell because Ah. We've told you we are.
Comprehensively contracted and sort of our contracts are multi year. So on any given year. You can you probably have only 15% to 20% or so being negotiated and so it's a little early to tell as it relates to your question on Who's got power. The reality is as you know as the pair.
Have more market share than we do in any given market and so it's a it's a good conversation what we're all trying to do now to see if we can align our incentives to get more progressive contracts to save costs to the overall system and so it's a bit early to tell there's a lot going on in revenue as you're well aware since you've.
Practice for a long time.
Because you've got of course mix and right and and a lot of other variables.
But we continue to think of the the foreseeable future at least the that the yield will continue to be in that 1% to 2%.
<unk>.
Alright, let me just last question I guess you know they are P. T has been aided by you know to shift into M. A I guess, where do you think we are in that shift you know I guess, we all have the baseball analogy waiting are we in there with you.
I could get similar type lives in 23 or 24 or are we largely yellow.
Getting to this city state here.
Yeah, I don't know what in England, but but I think the biggest jump has happened we went from obviously being subpar in the market to being roughly at market. We continue to see our new patients selecting a M. A at a higher rate than Medicare and so.
We think that it'll just continue to be more incremental but slightly higher than that in a market overall.
Alright. Thanks.
Thank you.
Thank you. Our next question comes from just in Lake Bluff Research. Your line is open.
Thanks, maybe we can stay on revenue for treatment for a minute so.
You said that you know the.
Seasonality around co pays and stuff hurt you by about 30 million, that's a little over $4 a treatment.
So revenue per creamer would've been up sequentially about 1% people with.
Medicare rates doing plus M. A plushie said commercial based got better.
<unk> is there some other piece we're missing here besides that on revenue portrait huh.
No just in there there's nothing that you're missing I think if you if you look at the.
I think it's called out the right things and they roughly balance out there are a few other little things is there always is a little bit of variability, but there's nothing else to the story.
Remind me what what was Medicare right.
Again.
It's in the high ones, one somewhere in the 1.7% to 1.9% range.
Right. So that alone would have would have gotten you know my map you know, there's a little fuzzy, but it would have gotten you a little over one per cent alone.
Plus you said commercial mixed got better so that would have gotten your you know your $4 back.
The commercial mixes better you said she was so can you give us that number and if so what are the commercial mixed do sequentially. It would M. A M a penetration do sequentially.
Yeah. So I think the government right number you're a little high on there is some Medicare or bad that you have to take into account there. There's there's some mix changes within government there is flu shots.
There is so there is a bit of noise in there, which is I think preventing you from getting your numbers to tick and tie.
Okay can you tell me, what Medicare advantage and ER commercial mixed it.
The first one.
A mix came out at just under 45% for the quarter and commercial mixed with 10 and a half price just under 10 and a half for the quarter.
And what were those numbers in Fork you.
Hold on one second.
And May mix was 39 per cent.
And Ah <unk>.
Commercial.
10.2 10.38 per cent.
Okay.
And then you know getting back to the sequential earnings when you said two Q.
Is kind of rebound sorry, I gave you a bad number Q for an anime was 42 per cent.
Okay.
Thanks for that so that you said to choose going to rebound. After Q1 at some you know a couple of.
Ah seasonality issues are you, saying rebound to like fault. You know, we just wanted to try to get consensus and it'll models in line with what you're thinking at least.
So.
Is that gonna be kind of in line with the fourth quarter. When you say rebound is it going to be for the fourth quarter level is gonna be beyond that anything you can help us with her yeah, I mean, I've been really reluctant to start giving quarterly guidance, so I'm going to stay away from that question.
Okay.
Then you'd given us a number on on wages I think it was 100 to 125 million that you would put incremental.
The typical in in the O Y Guide you Wanna give us an updated number there.
Yeah, I think we're now thinking about the high end of the range for that Q1 came in about six per cent.
Up year over year, and you can I think model that on a base of about three and a half billion dollars and we're now looking.
Probably somewhere just below 6% were now looking somewhere around six maybe a smidge above that for the full year.
But that that that would get you a number of consistent with a high end of that range.
Okay, and then just lastly.
B a lot of us kind of looked at the hospital rates that came out.
And you know we're scratching our heads as to why you know there some of this labour pressure and inflation a general didn't seem.
To be reflected I know you guys spend a lotta time talking to see about.
When.
Your rates I I don't think it's come out yet, but when do we.
When did that start to occur to you think that in dialysis voice for instance for 2023.
So we're going to start seeing so CMS start embedding some inflation there yeah.
Yeah. So look I think the 22 number was higher than than normal and you know I don't know that we have a whole lot of insight more than you do about why but I'd say inflation is probably a good assumption, we're not going to see the preliminary rate for 2023.
Till late June or early July .
Okay, but remember Austin the the Formula is not as straightforward as one would think so you you would think that they would grab some kind of either past experience or future experience. There was literally tailored to our specific financial.
That's not the case, they literally grab a basket update and do some future modeling and then they apply some kind of productivity and deck and then they'd come out with the number.
So it's it's Ah labor based on hospitals, and it's two years old and so there's gonna be a bit of a lag as a point.
That's the issue Okay. That's what I was trying to get a little smarter on all of you I appreciate that so you're saying that with Medicare is building in in terms of whatever inflationary.
Pressure of the resolved wages or whatever inflation is happening all wages is coming from two years ago. So there there twenty-three rate is based on 21 inflation.
That's how I understanding Justin.
Okay all.
Hi, Thanks for all the caller thank.
Thank you.
Missy.
Operator.
Our next question comes from Peter.
Please go ahead.
Open.
I as citizens take my questions going back on the first square treatments I understand the an increase in mortality entering the Miss treatments seasonality previously you got it sort of 2022 treatments to growing or 1% to 1.5% I guess any changes to that assumption and then can use or quantified treatments you saw.
In March and April and what shall easy modeling for sequential treatment growth in the tissue.
Yeah. So we are we are thinking that treat the year over year treatment growth will be down relative to the kind of have to 1% that we had talked about in the past and.
I'd say somewhere closer to zero is a better way to model it now.
We didn't see a dramatic decline over the course of the quarter. So this is from memory, but the numbers were something north of one and a half thousand in January a few hundred in February and then I think 150 in March.
So then now so the the excess mortality number did come down significantly.
If in terms of how to model Q2, again, a lot of uncertainty here if historical patterns hold you'd expect to see treatment per day growth in Q2, and then the next surge really come in the summer, it's not clear whether historical patterns will hold.
So could you give us just as a range you know with what you guys see you on your treatments or where it's tracking I guess in April you know sequentially. This shape growing 50 basis points from wants you to a T. T. I mean, if there's more treatment days, but then he also had the.
[noise] mortality of different around so I guess, you can quantify forest treatment croceate into Q.
Yeah. So I I first of all I'd focus on modeling treatments per day.
Because you'll just get a cleaner number with the number of treatment days I think I'm comfortable saying, it's gonna go up it's I'm not sure I'm ready to quantify it yet.
Okay Ah Ah does this question on ready for treatment you know I got to do is log looking parts with Nixon kobe's Kobe et cetera normally from once you have to key we add ins for five to $6 from the first quarter.
I guess around 367 for two two revenue for treatments at the rate we're thinking about it.
I think your your number is ripe for a normal year I would remember that we.
We are getting about 17 million of sequestration dollar a sequestration suspense dollars in Q1 that number gets cut in half for cute too. So we'll lose call at eight or $9 million of revenue as a result of that so that'll cost.
US a little bit more than a dollar a treatment.
Okay. So it's R 360, six's right, we're thinking about two Q.
I think that's a good starting point yeah. Okay, and then last question here on the I K F. A group did you guys get the troops Ah from you mentioned her partners for 2021, just curious if you give us some color on sort of it.
Those patients did in 21 for certifications any color on the cadence of losses patients who had.
Joined you in the first quarter of 21 versus the fourth quarter of 21, I guess, what sort of you know how it is losses sort of change and then the last question is I saw Iraqi have losses are down sequentially.
Three 7 million and once you for 300 million the fourth quarter. Just you know I thought they would have gone up considering you know you're bringing a more based on lines. It aims for title that all for me that'd be great.
Yeah. So so first on the 2021 true ups they'll come much later in the year, we haven't really.
Seen much on that so we've got no reason to believe anything is is significantly different in terms of the Ah I K C losses, they're down a little bit.
In Q1, I think we got some payments in Q4 of last year.
That.
But it's really mostly just normal variability I don't think there's anything big to call out there.
Okay. When you get the the troops from your managed care partners for last year.
It it varies in different partners, but I would expect most of them will be in the back half of the year.
I remember there you've got to let the claims run out for quite a while until you really know what the numbers are.
Got it and then just lost confirmation.
Got answers for the low end of the range for 2020, twos, but you're still maintaining the 240 to 400.
We should be twenty-three models around 18, 75 423, yeah.
Yeah, So I I build the 250 to 400 off of the the the new number we gave you.
So.
I mean.
I'm just doing the math in my head I think you're you're in the right ZIP code with the 18 75.
Okay, great. Thanks, so much for us.
Thank you I'm showing neither questions in queue at this time.
Okay. Thank you Ah well, let me end with a couple of closing comment patient outcomes.
An improvement to the quality of life of our patients continue to energize are 65000 professionals.
Because of Covid and inflation uncertainty the short term continues to have materially less visibility than usual in particular, as we discussed in volume and a wage rates.
We are deploying a lot of energy to innovate and reduce our cost structure to mitigate some of these uncertainties and.
And we continue to feel very confident that the investments and capabilities that we're building where position it to outperform in the years ahead I.
Thank you for your time and an investment in davita be well.
[noise] that does conclude today's conference you may disconnect at this time and thank you for joining.