Q1 2023 DaVita Inc Earnings Call
Good evening My name is Michelle and I will be your conference facilitator today.
At this time I would like to welcome everyone to the Davita first quarter 2023 earnings call.
All lines have been placed on mute to prevent any background noise.
Would you like to ask a question. During this time simply press Star and then the number one on your telephone keypad.
If you would like to withdraw your question. Please press Star then the number two.
Mr. Eliason, you may begin your conference.
Nicolaisen group, Vice President of Investor Relations and joining me today are 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 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, subsequent quarterly reports on Form 10-Q, and other subsequent filings that we make with the SEC.
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.
Thank you Nick and thank you all for joining the call today.
2023 is off to a strong start for davita.
We entered the year with a cautious balance of optimism about our ability to execute against our plan and uncertainty about premium volume in a challenging labor market.
In the first quarter, we performed well on our key metrics and our results benefited from an improving macro environment.
While some external uncertainties remain the continuation of current trends would put us on a path to deliver strong results for the full year.
Before I get into the details about the quarter I would like to elaborate on an area of our long term strategy, which is to connect transitions of care solutions for our patients across each step in the kidney care continuum.
That leads me to a clinical highlight around TKD education.
Periodically we have provided updates on our community education program called kidney smart raising.
Raising awareness through education, and the kidney care community, it's critical particularly given the fact that one in seven American adults have chronic kidney disease and the majority of these people are not aware.
Ah kidney Smart program is designed to help those patients understand and manage their kidney health and it's frequently recommended by Nephrologists as a go to resource for patient education to.
To help remove the barriers to health equity we've offered these classes in 10 different languages.
In 2020 to over 33000, <unk> patient that tended to kidney smart glass.
Best ever for the 12 year history of the program.
Moreover, in 2022, Davita patients, who attended kidney smart classes were more than twice as likely to choose a home modality in consultation with their Nepal and care team.
Transitioning to our financial performance in the first quarter, we delivered adjusted operating income of $352 million and adjusted earnings per share of $1 58.
As we discussed in prior quarters, we implemented a number of initiatives in the second half of 2022 to respond to the pressures associated with lower volumes and higher costs.
These plans combined with a strong operating rigor translated into positive results in the quarter and we're now seeing some of the operating metrics that impacted margin in 2020 to begin to normalize.
Start with the biggest driver of Q1 outperformance labor.
We made good progress on labor costs in the quarter, which reflected a combination of operating diligence and improvement in the overall labor environment as.
As we have said in the past successful labor management requires effectively managing the interplay between wage growth contract labor and training costs.
Our operators continue to improve on the permanent staffing levels within our clinic, which has enabled us to drive further reduction in contract labor cost during Q1.
We're tracking ahead of plan and are accurate.
Full year contract labor expense and half relative to last year.
The increase in permanent teammates combined with elevated turnover resulted in training costs in the quarter above historical norms.
Though below the peak we saw last summer.
This is in line with our expectations and we anticipate improvement in our training productivity in the back half of the year.
It will largely depend on successful teammate retention, which has historically tracked closely with the health of the broader labor market.
Moving onto treatment volume quarter over quarter treatment per day were up approximately 1% and better than the middle of our expected range.
Was driven by net census gains due to both higher admin and lower mortality.
Because of the amortization of excess mortality from 2022, we still anticipate a reduction in overall treatment volume on a year over year basis, and we continue to assume excess mortality over the balance of this year that said, we're encouraged by our first quarter volume results.
What we saw in Q1 proved to be a trend. We would expect this finished the year in the top half of our volume forecast range of down 3% to flat relative to 2022.
Transitioning to a couple of strategic Capex on April 1st Davita, and Medtronic announced the launch of Mozart Medical and New independent device company focused exclusively on innovated kidney health technology.
Most of our current products and its R&D pipeline ranging from kidney access technologies to advanced home dialysis in acute therapies are intended to improve the overall patient experience and increased access to home based care.
A leader in health care technology.
And finally note on integrated kidney care or <unk>, we continue to make progress consistent with our business plan and demonstrate that our model of care is improving the health and wellbeing of our patients I'll highlight two examples of it.
First across our ITC program more than half of our patients achieved an optimal start which mean the patient initiated dialysis treatment at home.
Or appropriate vascular access in place.
Optimal start reduce costly and difficult hospitalization and on average leads to a reduction in the continuing cost of care in the months and years that follow.
Second recent data continued to show an encouraging differentiation and hospitalization rates from patients in our ITC program versus our overall patient population.
As we continue to scale, our <unk> business, which is measured by the total dollars of medical spend in our program. We will continue to focus on driving our net saving rate, while pursuing a cost efficient model of care.
In summary, looking across our most important operating metrics, we're seeing progress at a faster rate than assumed in our initial forecast.
Therefore, we are revising our adjusted operating income range of $1 4 billion to $1 6 billion to a range of $1 75 billion to one $6 billion to $5 billion and revising our adjusted earnings per share range of <unk>.
$5 45 to <unk>.
$6 95 to.
To a range of $6 20.
To $7 30.
Thanks, Javier I will start with some additional commentary on first quarter results and then I'll add detail on our expectations for the remainder of the year.
Javier said Q1, adjusted operating income was $352 million adjusted EPS was $1 58, and free cash flow was $265 million.
Overall the results were at the high end of the range of our expectations for the quarter driven roughly equally by three things first strong operating performance in the U S dialysis business.
Timing of certain items in our <unk> results and third some normal positive variability and a couple of cost items that we are not forecasting to recur in the rest of the year.
With that let me provide some additional detail.
First U S dialysis treatments per day were up almost 1% in Q1 compared to Q4.
As Javier mentioned this was due to higher patient centers Mitch.
This treatment rates remained elevated compared to pre COVID-19 levels and were consistent with our expectations.
Revenue per treatment was down 16% quarter over quarter, driven by normal seasonal impact of high patient responsibility offset by annual increases in Medicare fee for services rates that begin in January .
Growth of MAA and seasonal increases in acute treatment.
On a non-GAAP basis patient care cost per treatment decreased by $1 18 sequentially.
The biggest drivers of the change were pharmaceutical cost savings from our anemia management transition to Mircera reductions.
The reductions in our contract labor spend and positive variability and health benefits and insurance costs.
These were offset by higher compensation costs, and two fewer treatment days in the quarter.
On a non-GAAP basis, G&A expenses were down $24 million quarter over quarter, largely due to normal variability in our G&A spend.
<unk> adjusted Oi for the quarter was approximately the same as Q4 and better than expected.
Quarterly <unk> results benefited from revenue that was forecasted to hit later in the year and the deferral of certain expense items that we expect will be recognized in Q3 and Q4.
Excluding these items.
Results were in line with our expectations.
International adjusted operating income was up $12 million relative to Q4, driven roughly equally by foreign exchange and acquisition related expenses in Brazil during Q4.
Looking at our capital structure, we ended the quarter with a leverage range of approximately three nine times EBITDA.
We did not buyback any shares during the quarter as our focus continues to be to get back to our target leverage ratio of three to three five times EBITDA.
In the last week of April we closed on a successful $2 75 billion refinancing of our revolving credit facility and term loan a despite a challenging capital markets environment.
Looking forward, we still expect interest expense of $100 million to $110 million per quarter for the rest of the year.
The April 1st launch of Mozart Medical our partnership with Medtronic will result in approximately $20 million of pre tax losses below the Oi line in Q2.
This is less than previously shared due to timing shifts of certain standup costs.
In the back half of the year, we still anticipate $15 million of negative impact on other income per quarter.
And as we shared previously we expect Mozart's Oi.
Trend towards breakeven in approximately the next three years.
Regarding the savings initiatives, we've talked about in the past we're on track to realize year over year savings within the range of $125 million to $175 million consistent with prior expectations.
This is primarily driven by a reduction in pharmaceutical costs and our ongoing facility consolidations.
During Q1, we initiated our conversion to Mircera, which will continue to roll out over the remainder of the year.
Additionally, in Q1, we consolidated 20 centers and currently anticipate consolidating another 40 to 50 centers over the remainder of the year.
We continue to achieve high patient and teammate retention rates related to the ship.
As the majority of patients have consolidated centers have transitioned to nearby davita facilities.
That concludes my prepared remarks for today operator, please open the call for Q&A.
Thank you Sir at this time, you May press Star one on your telephone keypad to ask a question. If you would like to withdraw. Your question you May Press Star two one moment. Please for the first question.
Justin Lake with Wolfe Research you May go ahead Sir.
Thanks, I appreciate all the color Joe maybe you could talk a little bit about what youre seeing you talked about higher turnover and lower lower.
Temp labor costs, what's going on with turnover there what are you expecting for the rest of the year and our labor cost tracking versus kind of the headwind that you had laid out for us and then maybe given the upside in the quarter. What are you projecting for the rest of the year relative to Q1, and if you do hit these numbers when do you think you'd get back to kind of your target leverage.
Seo and therefore, the potential to buy back shares.
Okay, well, there's a lot in there so let me just pull up for a second and then Joe can answer some of your follow up questions. Justin This is Javier.
First on labor, we started to give a little more color when we had more volatility in some of the underlying.
Sure.
Metrics, but I think it's a good time right now to pull up as you ask which is a bigger number but just so we're clear on all of the metrics. When you talk about SW B's you've taken into account wages.
Productivity.
Benefits training and contract labor.
Wages. There is obviously you can double click on that you've got over time shift differential and other things, but let's stay with those five.
In the third quarter of 2022, we had a spike in training and contract labor that we called out because they were outliers to our historical numbers.
Then as we fast forward to today, we worry that people arent faisel enough with the math.
To calculate the interplay between the five.
So let me see if I get to your number and if not you can follow up a question. So from 2018 to 2022, we had a CAGR of roughly 2% NSW beads.
In 2022, which of course had that outlier that we were just talking about that number went to roughly 8% growth.
And in 2023 of our 2022, we expect that number that incorporates all of those variables to be more in the 4% to 5% growth.
So does that answer the question on labor or do you want to ask a follow up on that.
Yeah just.
Mostly on labor, what I'm trying to figure out is versus that 4% to 5%. If you continue at this pace, where do you think you end up.
I would say Justin.
We're thinking we're about $25 million ahead of where we thought we would be on the on the total labor cost. So if you think.
Think of our guide increase at the middle of the range of $50 million I'd say half of that is labor and half of that is volume and that's how I get to $25 million.
And is that just for the first quarter, Joel and I'm kind of trying to think about like if this continues does that mean youre 100 better.
Well on the in the Labor line itself. There were some items that we don't think will recur. They were good guys in lines like benefits and workers comp.
That I'd strip out as you think about Annualizing things so.
So the 25 would be a full year number in terms of where we need to go from here.
We're expecting continued wage pressure as the year presses on.
There will be a little bit of improvement in contract labor, but we've seen most of the improvement in contract labor that we're likely to see because it just happened faster than we thought.
And on the.
Productivity side, we haven't seen much we're off the peak that we saw in the middle of last year, but we're still well above pre COVID-19 levels and what we're currently building is some progress in the back half of the year, but ending the year still above pre COVID-19 levels and thats.
Really driven largely by.
The turnover that we're seeing.
That's helpful I'll take the rest of my questions offline. Thanks.
Thank you. Our next caller is Kevin Fischbeck with Bank of America. You May go ahead Sir.
Hi, this is actually in India the Cherokee.
Kevin Thanks for taking the question.
And just another quick question on Labor you said you're.
We expect continued wage wage pressure in the year.
What are you assuming for wage inflation this year and how does it compare to last year and pre Covid My boss.
Yeah I think.
It was really answered a little bit with just into let me make sure we're asking the same thing.
So we just basically said that if you take all of the variables into account that we think that <unk> will be 4% to 5% higher.
23 over 22.
Does that answer your question.
Yes. Thank you.
Thank you.
Thank you. Our next caller is Andrew Mok with UBS you May go ahead Sir.
Hi, This is Thomas on for Andrew Thanks for taking the question.
To start could you walk us through your underlying drivers of the treatment growth in the quarter as well as provide an update on how mis treatment rates are tracking sequentially. Thanks.
Sure. Thanks for the question so.
I'd like to use the.
Treatment per day number and you'll see that that number is up about 90 bps quarter over quarter that is largely driven by census increases and thats. The result of admissions.
Increases in Q1.
Offset by continued excess mortality, which is way down relative to prior years, but remains higher than it was pre COVID-19 in terms of missed treatment rates.
Continues to trend well above the pre COVID-19 number it can move around from one quarter to the next there is a lot of seasonality in the other impacts in it but we are still seeing it running roughly 100 basis points higher than what we saw pre COVID-19.
Got it that's helpful and.
A quick follow up I wanted to ask about the Esa switch to Mircera specifically.
Are there any kpis you can share to track the transition and do you have any update on the cadence of the rollout.
We do not have any disclosures on it all I can tell you is that the rollout is going as well as we expected.
And that from a clinical perspective.
We are seeing the results that we want it so.
It's going as planned.
Great. Thanks again.
Thank you.
Thank you once again, if you would like to ask a question you May Press Star One our next caller is Peter Chickering from Deutsche Bank You May go ahead.
Hey, good afternoon, guys just a follow up on Justin's question on the $50 million operating them raise you said half was labor and half was better volumes you added almost 60% new lives into Ikea see I guess any changes and how that is tracking versus your previous guidance and then on the guidance raise can you walk us through why $50 million of operating income.
Transient and $200 million of free cash flow is that just working capital or anything else in there.
Let me take the first part of that and Joe can take the second part of that.
As you can imagine it is a growing business and while were making really good progress. It is clearly in the investment phase of the business and so there is no change in what we see the full year, we had a bit of timing in there. So the number looks a little better on a quarter to date than it.
On an annualized basis, we are still on.
On target to what we've said.
Yes, Pedro on the free cash flow as you pointed out obviously an increase in Oi helps that the other two things are one cash taxes.
Are trending better than we expected and the second is working capital you see the Dsos were down considerably. So we think we'll get a bit of a.
Tailwind to that as well for the year.
Okay, and then just as Cigna Casey for a second.
Realizing that when you add on you know 50, almost 60% new lives that's going to be sort of a drag as you think about those coming on line, but any sort of color on sort of how the medical cost trends are tracking for your people.
You had coming into the year I mean, we've seen spikes of utilization and other areas of health care, just curious kind of how that class of <unk> was tracking during the first quarter.
Yeah.
As you said, we agree it's a little hard to say because we have so much noise and volatility because of COVID-19 and so there's not a lot to report what we're seeing is that the savings are coming in line to where we expect the model of care is a little less efficient than we were.
What we need to build more scale and we need to standardize a whole bunch of these things that right now our manual. So we're still working progress we're growing a lot of things that we want to be and we're still.
We're still expecting to be breakeven in 2026.
Okay, and then sorry, one last question here, which won't shock you looking at the <unk> growth.
So we're flat year over year definitely a lot better so trending that we've seen for the last several quarters back. So we're talking about sort of similar normalization of utilization I guess any color you can give us on how many patients. He has added this quarter, how did that sort of track versus say 2022 versus pre COVID-19 and then any more color you can give us on.
Where mortality is tracking on current patient base today.
Yeah. So let me walk you through some numbers Pedro here. So the net census growth in Q1 was about 30 550 patients.
You compare that to what it was in Q1 of 'twenty two that was negative almost 500 patients. So in almost 2000 patients swing.
Most of that is explained by the change in excess mortality. Although some of it is also the result of a better AD mid quarter. This quarter than we saw last year. So on both the mortality side and the admin side, we saw we saw progress.
So on the admin side I guess can you give us a color of serve the <unk> 23, new adds and how that was <unk> 19, just as some comparison on a pre COVID-19.
If you were to look at this excluding excess mortality.
Don't have the numbers in front of me, but I can tell you.
It was definitely higher this quarter than it was Q1 of 2019 that said I would be cautious before we start extrapolating. This out this is one quarter of data. This metric historically has been.
Variable quarter to quarter, and I'd want to wait to see what happens for a few more months before we're ready to really declare a trend here.
So maybe just a last question on that one sorry to keep going there, but youre looking at the U S. Rds data when we go back for many years the incidence rate of end stage renal disease has been fairly consistent for nearly.
Nearly a decade.
All signs youre seeing that we are returning to normalization of incidence rates and it's just too soon somebody to call. It at this point.
It's a little too early to call it.
We've been studying and evaluating all different data sources.
And we're now ready to draw any conclusions.
But you know theres a lot of movement upstream on the CK depopulation in particular with Covid and so.
So we will look because as you know there is some things there.
They're making progression slower on the other hand, theres things that are expanding life expectancy.
So our math is.
They're not leading to any conclusion at this point.
And then last piece here I promise I'll stop here at least for now is on mortality I guess any color on sort of where the normal mortality was in excess mortality and for how we should think about both of those continuing in the back half of the year and I'll stop there.
Yeah. So.
Excess mortality was about 900 patients in the quarter.
We have brought down slightly our expectations of excess mortality for the balance of the year, but we're still looking at a number somewhere between two and a half and 3000 patients.
In terms of what's built into the middle of our guidance range.
Great I'll start there.
Thank you.
Thank you our next caller is Gary Taylor with Cowen You May go ahead Sir.
Hi, Good evening I think just two quick number ones for me, Joe you had mentioned or at least in the release.
Some favorable items and G&A, including advocacy refund just wondering if you could.
Is that for us and then on.
Hi, Casey I know, there's a ton of moving parts.
Parts, there, but I was just trying to sort of.
But how the the revenue was down 4 million sequentially from <unk>, but you said you had.
Better than or some early revenue there and some delayed expense so just trying to sort of foot down but still.
Including some early revenue recognition.
Sure so.
$6 million is the ballot number youre looking for in terms of I K C. We saw about 20 million roughly half in the revenue line half on the expense line that we were expecting we were just expecting it later in the year in terms of the timing of the revenue.
We generally view <unk> revenue to be back half of the year loaded as you think about that.
The claims lags.
Filling up or maturing and then ultimately the calculations on shared savings being done that.
That usually happens in the back half of the year and that's when we'll recognize the shared savings dollars. That's why you see the decline from Q4 with still a.
Call It a positive timing surprise.
Got it.
Perfect. Thank you.
Hey, Gary.
Thank you. Our next caller is Peter Chickering with Deutsche Bank May go ahead Sir.
Alright, sorry, guys I just had a couple a couple of NOI come back to you on.
So ready for treatment.
Sort of flattish sequentially, primarily due to sort of the seasonal co pays just curious two questions. I guess, what are you seeing from managed care on cost of living updates.
And then how should we think about revenue per treatment are going for the rest of the year.
Yeah. Thanks, Peter a couple of things, we're not seeing anything to report on from the managed care negotiations and just to refresh you. We've talked about our contracts are multiyear in any given year, we negotiate roughly about 20% or so of our portfolio and we're not seeing anything.
Different than this year, what we've talked about in Q4 last year that we said that we would get a revenue per treatment increase year over year from 2% to two 5% 23 over 2020 over 22.
Okay, Great and then sorry.
On the efficiencies from closing of centers, Yes, we're close to <unk>. This quarter, you talked about consolidating other 40 to 50 centers.
Yes, how much savings do you think you're going to realize in 'twenty three from the center consolidations just solely on that line and how much of that then should trend through for 2024.
Yes, so we haven't quantified the number we've always said it will be part of the 125 to 175, but not the biggest piece. The biggest piece of that is Merck serono will get so that'll be in 'twenty three there'll still be some amount that will roll.
Over into 'twenty, four, but we will get most of it in 2023.
Okay, and then last one here for me what it maybe I missed it but what was the contract labor dollars.
This quarter what are you seeing the rest of the year and then any color on what your where your hiring was in net hiring was in the first quarter.
Yeah. So I think what we said was that in the year last year I remember contract labor was running around.
<unk> million dollars and we said for the year. This year would be half of that and now today, we moved that to that we are moving better and better.
Pace, so that number will be more like 35, but again I would point you to the beginning of the conversation where we said the most important part is the interplay between all the variability of all of those metrics because of course training productivity wages.
Benefits and contract labor are all intertwined.
But that's the number.
And I guess the second part is can you quantify or quantify for us. The number of hires you had in the quarter and what the net hiring was after a turnover.
And how that should trend throughout the year, because you mentioned about lower training costs as his Bachelor. It comes online just help hoping you can quantify the forest.
Yes, so here's the way I think about the training cost stay where they peaked last year as a result really of two things higher turnover combined with the need for us to net add staff.
And those combined to up to a high training level as we sit here today.
Turnover remains elevated its gotten better on with some classes of Lady bird than others, but it still remains elevated so we're expecting continued high training levels until that comes down we're modeling the back half of the year, but we are much closer or at fully.
<unk> staffed so some of the training associated with getting the staffing levels back up is now done and that will mitigate some of the the training costs relative to the peak we saw in Q3 last year.
When you talk about sort of 4% to 5%.
Not a lot.
The change in contract labor is a much bigger tailwind relative to 'twenty, two and the training productivity and Thats.
It's partly because we are not going to see the training productivity improve till the back half of the year. It's also partly because in the beginning of 2022 training productivity was still low. So we saw the spike in Q3, but that was only one quarter.
Okay, great. Thanks, so much guys I appreciate it.
Okay.
Thank you and at this time I am showing no further questions.
Yes.
Thank you Michelle and thank you all for the questions.
As I hope you've heard today, we have some positive momentum to start the year, but the results of Q1 proved to be sustainable trend. We're excited about the implications for our patients our teammates and our financial performance in 2023 and beyond Thank you all for joining the call and be well.
Thank you. This concludes today's conference call you May go ahead and disconnect at this time.